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    Utility Analysis of Demand

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    Sneha Bhambhani
    The document discusses marginal utility analysis and its key concepts. It defines marginal utility as the additional satisfaction derived from consuming an additional unit of a good or service. The law of diminishing marginal utility states that the marginal utility of a good decreases with each additional unit consumed. Marginal utility determines price, as consumers will purchase goods up to the point where price equals marginal utility. Marginal utility is influenced by factors like supply levels and the availability of substitutes or complements.

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    Utility Analysis of Demand

    Uploaded by

    Sneha Bhambhani
    254 views14 pages
    The document discusses marginal utility analysis and its key concepts. It defines marginal utility as the additional satisfaction derived from consuming an additional unit of a good or service. The law of diminishing marginal utility states that the marginal utility of a good decreases with each additional unit consumed. Marginal utility determines price, as consumers will purchase goods up to the point where price equals marginal utility. Marginal utility is influenced by factors like supply levels and the availability of substitutes or complements.

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    The document discusses marginal utility analysis and its key concepts. It defines marginal utility as the additional satisfaction derived from consuming an additional unit of a good or service. The law of diminishing marginal utility states that the marginal utility of a good decreases with each additional unit consumed. Marginal utility determines price, as consumers will purchase goods up to the point where price equals marginal utility. Marginal utility is influenced by factors like supply levels and the availability of substitutes or complements.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    254 views14 pages

    Utility Analysis of Demand

    Uploaded by

    Sneha Bhambhani
    The document discusses marginal utility analysis and its key concepts. It defines marginal utility as the additional satisfaction derived from consuming an additional unit of a good or service. The law of diminishing marginal utility states that the marginal utility of a good decreases with each additional unit consumed. Marginal utility determines price, as consumers will purchase goods up to the point where price equals marginal utility. Marginal utility is influenced by factors like supply levels and the availability of substitutes or complements.

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    of 14

    UTILITY ANALYSIS OF DEMAND

    Marginal utility
    The additional satisfaction or benefit (utility)

    that a consumer derives from buying an additional unit of a commodity or service.


    The concept implies that the utility or benefit to

    a consumer of an additional unit of a product is inversely related to the number of units of that product he already owns.
    Marginal utility=

    Change in total utilty Change in quantity consumed

    Marginal utility and price


    The consumer stops where the price and

    marginal utility are equal.


    All units of commodity being

    interchangeable , what is paid for the marginal unit is paid for every unit.
    Therefore , we can say that marginal utility

    determines price.

    Marginal utility and supply


    Marginal utility is a function of supply, i.e., it

    varies with supply .


    In the case of a free good, where the supply

    is unlimited , the marginal utility is zero.


    Only in the case of scare goods is the

    marginal utility is positive .


    It increases as the supply contracts and

    decreases as the supply increases.

    Basic assumptions of Marginal Utility Analysis


    Cardinal measurement of utility:- It is assumed that utility can be measured and can be given definite quantity like 1,2 or 3.This means that a person can express the satisfaction derived from consumption of commodity in quantitative term. Utilities are independent:-Marginal utility assumes
    that utility of different commodities are independent to each other.

    Constant Marginal utility of money:-Another


    important assumption is that the marginal utility of money remains constant.

    LAW OF DIMINISHING MARGINAL UTILITY


    This law can be stated as the fall in marginal utility of any

    good due to successive consumption of that good.


    For ex:- Suppose a person starts eating toast, the first

    toast gives him great pleasure. By the time he taking second he yield less satisfaction ;the satisfaction of third is less than that of second and so on. the additional satisfaction goes on decreasing with every successive toast till it drops down to zero; and if the consumer forced to take more the satisfaction may become zero.

    This can also be shown by graph


    20 15 10 5 Units of utility 0 -5 -10 -15 -20 1 2 3 4 5 6 7 8

    Units of commodity

    Diminishing marginal utility curve

    LIMITATIONS OF THE LAW


    Suitable units:- It is assumed that the commodity is

    taken in suitable units.


    Suitable time:-It is further assumed that the

    commodity is taken within a certain time, otherwise law will not apply.
    No change in consumers tastes:-Another

    assumption is that the character of the consumers does not change.


    Normal persons:- The law of diminising marginal

    utility applies to normal persons and not to eccentric or abnormal persons like misers.

    Constant income:-it is also essential that

    the income remains the same. Any change in income will falsify the law.
    Rare collections:- In case of rare

    collections ,the law does not hold good.


    Fashion:- Further, fashion utility depends on

    fashion too.

    Marginal utilities of related goods


    There are two types of relationship

    between goods:

    1.They may be substitutes 2.They may be complementary goods

    In case of substitutes
    The substitutes are capable of satisfying same

    want.eg tea and coffee, rail transport and road transport.


    In case of such goods ,other things being

    equal , the marginal utility of any such goods decreases as the quantity of the substitute goods with the consumer increases.

    In case of complementary goods


    Complementary goods are such goods which

    are wanted together for the satisfaction of a want e.g., car and petrol.
    In such cases other things remaining the

    same, marginal utility increases as the quantities of the complementary goods with the consumer increase .

    THANK YOU

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