The document discusses marginal utility analysis, which examines how consumers derive satisfaction from consuming goods and services. It defines key concepts like total utility, marginal utility, diminishing marginal utility, and explains how they relate. The document also summarizes the assumptions of marginal utility analysis, including that utility can be measured, tastes and income are constant, and the marginal utility of money is constant. It then discusses how consumers seek to maximize utility by equating the marginal utility per rupee spent across different goods until reaching equilibrium.
The document discusses marginal utility analysis, which examines how consumers derive satisfaction from consuming goods and services. It defines key concepts like total utility, marginal utility, diminishing marginal utility, and explains how they relate. The document also summarizes the assumptions of marginal utility analysis, including that utility can be measured, tastes and income are constant, and the marginal utility of money is constant. It then discusses how consumers seek to maximize utility by equating the marginal utility per rupee spent across different goods until reaching equilibrium.
The document discusses marginal utility analysis, which examines how consumers derive satisfaction from consuming goods and services. It defines key concepts like total utility, marginal utility, diminishing marginal utility, and explains how they relate. The document also summarizes the assumptions of marginal utility analysis, including that utility can be measured, tastes and income are constant, and the marginal utility of money is constant. It then discusses how consumers seek to maximize utility by equating the marginal utility per rupee spent across different goods until reaching equilibrium.
The document discusses marginal utility analysis, which examines how consumers derive satisfaction from consuming goods and services. It defines key concepts like total utility, marginal utility, diminishing marginal utility, and explains how they relate. The document also summarizes the assumptions of marginal utility analysis, including that utility can be measured, tastes and income are constant, and the marginal utility of money is constant. It then discusses how consumers seek to maximize utility by equating the marginal utility per rupee spent across different goods until reaching equilibrium.
Download as PPT, PDF, TXT or read online from Scribd
Download as ppt, pdf, or txt
You are on page 1/ 47
Consumers Behavior
MARGINAL UTILITY ANALYSIS
Learning Objectives define total utility and marginal utility understand law of diminishing marginal utility describe relationship between total and marginal utility demonstrate demand curve define marginal utility of money illustrate consumer equilibrium
MARGINAL UTILITY ANALYSIS
Two Questions in Consumers
Behavior The first one is: why does a consumer demand a good or service. The second question: how should a consumer spend his limited income on different goods and services
What is Utility? Satisfaction, happiness, benefit
What is Util? A unit of measure of utility
Cardinal Utility vs. Ordinal Utility
Cardinal Utility: Assigning numerical values to the amount of satisfaction Ordinal Utility: Not assigning amount of
numerical
values
to
the
satisfaction but indicating the order of
preferences, that is, what is preferred to what
Initial Utility The utility derived from the first unit of a commodity is called initial utility. It is always positive.
Total Utility The total satisfaction derived from the consumption of all the units of a commodity. Consumption of n units of commodity, then the total utility (TU) TUn = U1 + U2 + U3 + .. +Un OR TUn =Mun
Example:
TU(X) = U(X) = 16 X X2
where X is the amount a good that is
consumed in a given period of time. 5 units of the product per period of time yields 55 utils of satisfaction
TOTAL UTILITY
Marginal Utility The additional satisfaction gained by the consumption of one more unit of something. MUn = TUn TUn-1 OR The change in total utility (TU) resulting from a one unit change in consumption (X). MU = TU/ X
MARGINAL UTILITY
CALCULATION OF MARGINAL UTILITY
The marginal utility of the 3rd
bottle of water = 36 units 27 units = 9 units.
CALCULATION OF MARGINAL UTILITY
The marginal utility of
the 3rd bottle of water = 36 units 27 units = 9 units.
GRAPHICAL PRESENTATION OF TOTAL UTILITY
AND MARGINAL UTILITY The figure shows total utility and marginal utility. Part (a) graphs Tinas total utility from bottled water. Each bar shows the extra total utility she gains from each additional bottle of waterher marginal utility. The blue line is Tinas total utility curve.
MARGINAL UTILITY Part (b) shows how Tinas marginal utility from bottled water diminishes by placing the bars shown in part (a) side by side as a series of declining steps. The downward sloping blue line is Tinas marginal utility curve.
If, by consuming additional units of a commodity, total utility increases then the marginal utilities of these units will be Positive
Negative Marginal Utility
If the consumption of an additional unit of a commodity Causes fall in total utility, it means the marginal utility of that unit is negative
Zero Marginal Utility
If the consumption of an additional unit of a commodity Causes no change in the total utility, it means the marginal utility of that unit is negative
RELATIONSHIP BETWEEN TOTAL UTILITY AND
MARGINAL UTILITY
When marginal utility is positive total
utility increases When marginal utility zero total utility is at maximum. It is also known as point of maximum satisfaction When marginal utility is negative total utility diminishes.
Total Utility
Marginal Utility
Graphs of Total Utility & Marginal Utility is where marginal utility
TU
X1
X1 reaches its maximum. This is where we encounter diminishing marginal utility. The slope of TU has reached its maximum; TU has an inflection point here.
X2
MU
X1
X2
X2 is where total utility
reaches its maximum. MU is zero. This is the saturation point or satiation point. After that point, TU falls and MU is negative.
Diminishing Marginal Utility
Each additional unit of a product contributes less extra utility than the previous unit. It is a psychological fact
Law of Diminishing Marginal
Utility The law of diminishing marginal utility explains the relation between utility and quantity of a commodity. when a consumer gets more and more units of a commodity, during a particular time, the utility from the successive units will diminish.
Assumptions 1.Utility is cardinal 2.The consumer is rational 3.Constant marginal utility of money 4.The consumers income is limited and constant 5.The tastes and preferences of the consumer remain unchanged 6.Diminishing marginal utility
Utility is cardinal It is assumed that utility can be measured and a consumer can express his satisfaction in quantitative terms such as 1, 2, 3, etc.
The consumer is rational
The consumer is assumed to be rational who measures, calculates and compares the utilities of different commodities and aims at maximizing total satisfaction.
Constant marginal utility of
money As a consumer spends money on the commodity, he is left with lesser money to spend on other commodities. In this process, the remaining money becomes dearer to the consumer and it increases MU of money for the consumer. But, such an increase in MU of money is ignored. As MU of a commodity has to be measured in monetary terms, it is assumed that MU of money remains constant.
The consumers income is limited
and constant It is assumed that income of the consumer and prices of the goods which the consumer wishes to purchase remain constant.
Consumption of reasonable quantity It is assumed that a reasonable quantity of the commodity is consumed.
Continuous consumption It is assumed that consumption should be a continuous process. For example, if one ice-cream is consumed in the morning and another in the evening, then the second icecream may provide equal or higher satisfaction as compared to the first one.
No change in Quality Quality of the commodity consumed is assumed to be uniform. A second cup of ice-cream with nuts and toppings may give more.
Independent utilities It is assumed that all the commodities consumed by a consumer are independent. It means, MU of one commodity has no relation with MU of another commodity. Further, it is also assumed that one persons utility is not affected by the utility of any other person.
Consumers Equilibrium A single
commodity Consumers equilibrium leads to a situation where a consumer gets maximum satisfaction out of his limited income He has no tendency to make any change in his existing expenditure pattern. The consumer is in equilibrium when the marginal utility of a good(x) is equal to its market price (Px).
MUx = Px
The consumer is in equilibrium when
the marginal utility of a good(x) is equal to its market price (Px).
MUx = Px Supposing, if MU P, there can be two possibilities
1. MU > P 2. MU < P
Law of Equi - Marginal Utility
The law of equi-marginal utility explains the behaviour of a consumer when he consumes more than one commodity. Further, it explains how the consumer spends his limited income on various commodities to get maximum satisfaction.
Law of Equi - Marginal
Utility The law states that a consumer maximizes his total utility by distributing his entire income optimally among the various goods consumed by him.
ASSUMPTIONS The consumer is rational so he wants to get maximum satisfaction Cardinal measurement of utility is possible Marginal constant
utility
of
money
remains
The income of the consumer is given and
remain constant
ASSUMPTIONS Fashions, tastes and preferences remain constant Prices of the commodities are given and remain constant Consumption takes place at a given time period
Consumers Equilibrium a Several Commodities When a consumer is consuming several commodities [suppose there are two goods X and Y] with different prices simultaneously, he will be in equilibrium at the point where the utility derived from the last rupee spent on each is equal.
The position of consumers
equilibrium thus can be stated in following ways The consumer is in equilibrium when the marginal utility of last rupee spent on each commodity is equal A consumer will be in equilibrium position where the ratios of marginal utilities of goods to the ratios of corresponding prices for each pair of goods are equal.
When a consumer is at equilibrium
He maximizes his satisfaction
He spends his entire income He attains optimum allocation of expenditure He consumes optimum quantity of each good
Derivation of the Demand
Curve If the marginal utility is measured in monetary units the demand curve for a good(X) is identical to the positive segment of the Marginal utility curve.
Constancy of the Marginal
Utility of Money This is one of the important assumptions of the marginal utility analysis. This means, marginal utility of money remains constant throughout when the individual is spending money.
Constancy of the Marginal Utility
of Money Measurement of marginal utility of goods in terms of money is only possible if the marginal utility of money itself remains constant. If the marginal utility of money varies, it is not possible to correct measurement of the marginal utility of the good.
Marginal Utility of Money and
Price change When the price of a good falls the real income of the consumer rises the marginal utility of money will fall. On the other hand, when the price of a good rises the real income of the consumer falls the marginal utility of money will rise.
But Marshall ignored this and assumed that
marginal utility of money did not change as a result of price change. Due to this assumption
Marshall ignored the income effect of the
price change Marshall could not provide a satisfactory explanation of Giffen Paradox Due to this assumption marginal utility curve becomes the demand curve of the good.
Demerits of Marginal Utility Analysis
Cardinal measurement is unrealistic
Assumption of constant marginal utility of money is not valid. Cardinal utility analysis does not split up the price effect into substitution and income effect. Marshall could not explain Giffen Paradox. Cardinal utility analysis assumes too much and explains little.
