Anil Classes

Subject: Economics

CHP 2: UTILITY ANALYSIS

(Total Marks: 07) (Marks with Option:10)

1. UTILITY is a Capacity or Power of a commodity to satisfy a human want.

E.g. Water, doctor,food,etc.

2. FEATURES OF UTILITY: (MRS BHIDE)

2.1. Multipurpose. E.g. Electricity, wood, steel.

2.2. Relative Concept. E.g. Woollen clothes – In Winter.
2.3. Subjective Concept. E.g. Walking stick to an old man.
2.4. Basis of demand. E.g. Medicines to a Sick person.
2.5. Measurement of utility is Hypothetical. E.g. utility / need for commodity cannot be
calculated in numbers. It could be Negative, Positive, Zero.
2.6. Depends on Intensity of want. E.g. Food for hungry person.
2.7. Differs from usefulness. E.g. Liquor, Drugs,.
2.8. Differs from Pleasure. E.g. Medicines, Injections.
2.9. Differs from Satisfaction. E.g. Washing powder, soap.
2.10. Ethically Neutral Concept. E.g. Knife, Gun, Rope.

3. TYPES OF UTILITY

3.1. Form Utility: Created due to change in shape, size of material. E.g. Toys from clay, furniture
from wood,etc.
3.2. Place Utility: Created due to change in place of commodity. E.g. Woollen clothes at cold
places than at warm places.
3.3. Service Utility: Created due to services provided by professionals. E.g. Services of doctors,
lawyers, etc.
3.4. Knowledge Utility: Created due to increase in knowledge of a product. E.g. Mobile phone,
computer, etc.
3.5. Possession Utility: Arises due to transfer of ownership. E.g. Transfer of goods from sellers to
buyers.
3.6. Time Utility: Created due to change in time of utilization of a commodity. E.g. Blood Bank,
a duster to a teacher.

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 Anil Classes
Subject: Economics

4. CONCEPT OF UTILITY
4.1. Total Utility (TU): It refers to the aggregate of utility derived by a consumer from all the
units of a commodity available at his disposal and consumed at a particular point of time.
4.2. Marginal Utility (MU): It refers to the additional utility derived by a consumer from an
additional unit of a commodity consumed.

5. RELATIONSHIP BETWEEN TOTAL UTILITY AND MARGINAL

UTILITY
5.1. Total Utility increases (TU , MU ) Marginal Utility Decreases.
5.2. Total Utility becomes constant ( TU highest, MU= 0 ) Marginal Utility becomes zero.
5.3. Total Utility declines ( TU , MU negative) Marginal Utility becomes negative.

6. LAWS OF DIMINISHING MARGINAL UTILITY

6.1. Introduction: (a) Proposed by - Prof. Gossen.

(b) Propounded by - Prof. Alfred Marshall, "Principles of Economics" 1890 .
(c) Meaning – Utility derived from a commodity diminishes with reduction in the
intensity of want Marginal Utility.

6.2. Statement of Law /Definition - "Other things remaining constant, the additional
benefit which a person derives from a given increase in his stock of a thing, diminishes with
every increase in the stock that he already has."

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 Anil Classes
Subject: Economics

6.3. Schedule / Table:

Units of X Marginal Utility
1 10
2 8
3 6
4 4
5 2
6 0
7 -2
The table shows that marginal utility keeps on diminishing with increase in consumption, further it becomes
zero and then negative.

6.4. Diagram

In the above diagram, units of commodity x are measured on X axis and marginal utility is measured on Y
axis. Various points of MU are plotted on the graph as per the given schedule. When the locus of all the
points is joined, MU curve is derived.

MU curve slopes downwards from left to right which shows that MU goes on diminishing with every
successive increase in the consumption of a commodity.

When MU becomes zero, MU curve intercepts the X axis. Further consumption of a commodity brings
disutility (negative utility) which is shown by the shaded portion in the diagram.

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Mob.: 9773570884/7208226627/9869244490
 Anil Classes
Subject: Economics

6.5. Assumptions:…………….(DEAR HSC)

1) Rationality : Consumer is assumed to be rational. It means that his behaviour is normal and he tries to
maximize his satisfaction.
2) Cardinal measurement : The law assumes that utility can be cardinally or numerically measured. Hence,
mathematical operations are easily possible to know and compare the utility derived from each unit of a
commodity.

3) Homogeneity : All units of a commodity consumed are exactly homogeneous or identical in size, shape,
colour, taste etc.

4) Continuity : All units of commodity are consumed in quick succession without any lapse of time.

5) Reasonability : All the units of a commodity consumed are of reasonable size. They are neither too big
nor too small.

6) Constancy : All the related factors like income, tastes, habits, choices, likes, dislikes of a consumer
should remain constant. Marginal utility of money is also assumed to be constant.

7) Divisibility : The law assumes that the commodity consumed by the consumer is divisible so that it can
be acquired in small quantities.

8) Single want : A given commodity can satisfy a single want of a person. The law assumes an experience
of a single want which is completely satiable at a given point of time.

6.6. Exceptions:………..(HAMPer)
1) Hobbies : In certain hobbies like collection of various stamps and coins, rare paintings, music, reading
etc., the law does not hold true because every additional increase in the stock gives more pleasure. This
increases marginal utility. However, this violates the assumption of homogeneity and continuity.

2) Miser : In the case of a miser, every additional rupee gives him more and more satisfaction. Marginal
utility of money tends to increase with an increase in his stock of money. However, this situation ignores the
assumption of rationality.
3) Addictions : It is observed in case of a drunkard that the level of intoxication increases with every
additional unit of liquor consumed. So MU received by drunkard may increase. Actually, it is only an
illusion. This condition is similar to almost all addictions. However, this violates the assumption of
rationality.

4) Power : This is an exception to the law because when a person acquires power, his lust for power
increases. He desires to have more and more of it. However, this again violates the rationality assumption. 5)

5) Money : It is said that the MU of money never becomes zero. It increases when the stock of money
increases. This is because money is a medium of exchange which is used to satisfy various wants. However,
4
Ramjyoti Building, Opp. Dhanvantri Hospital, N. S. Road, Mulund (W), Mumbai - 80.
Mob.: 9773570884/7208226627/9869244490
 Anil Classes
Subject: Economics

according to some economists, this law is applicable to money too. For example, marginal utility of money
is more to a poor person than to a rich person.

7. RELATIONSHIP BETWEEN MARGINAL UTILITY AND PRICE

Relation Conclusion
Mu x > Price x - Intra Marginal Units - Consumer Willing to Buy
Mu x = Price x - Marginal Units - Consumer’ Equilibrium
Mu x > Price x - Extra Marginal Units - Consumer Not Willing to Buy

The following schedule explains relationship between Marginal Utility and Price:

5
Ramjyoti Building, Opp. Dhanvantri Hospital, N. S. Road, Mulund (W), Mumbai - 80.
Mob.: 9773570884/7208226627/9869244490
 Anil Classes
Subject: Economics

6
Ramjyoti Building, Opp. Dhanvantri Hospital, N. S. Road, Mulund (W), Mumbai - 80.
Mob.: 9773570884/7208226627/9869244490