2 UTILITY ANALYSIS APPROACHES CARDINAL UTILITY ANALYSIS(marginal utility)ORDINAL UTILITY ANALYSIS(indifference curves)CARDINAL UTILITY ANALYSIS:This approach was given by Marshall,Manger and Gossen according to these economists utility can be measured.
3 Initial utility-utility derived from 1st unit of a commodity,eg,1st loaf of bread,it is always +. Marginal utility-the addition made to total utility by the marginal unit,in the words of chapman,”marginal utility means the addition made to total utility by consuming one more unit of the commidity.”MUn=TUn-TUn-1,MU=change in total utility/change in quantityMarginal utility can e of two types-positive zero,negative.Total utility-The utility derived by a person from the total number of units of a commodity consumed by him is called total utility.Tn=u1=u2=u3=u4=unRelation between total utility and marginal utility.Assumptions of utility analysis-
4 UTILITY ANALYSIS Cardinal measurement of utility: Utility is additive. Independent utilities.Marginal utility of money remains constantIntrospection.Assumption of rationality.Fixed income and prices.Stabiity of tastes.Assumption of divisibility.So utility can be measured,with help of money,is subjective,relative,has no relation with the profit n loss,ethics n morality.
5 CONCEPTS OF UTILITY- There are two concepts of utility- Total utility(TU)Marginal utility(MU)
6 LAWS OF CONSUMPTION BASED ON CARDINAL ANALYSIS- Law of diminishing marginal utility-given by Gossen-“Other things remains the same,as aconsumer goes on consuming a commodity,the marginal utility of each extra unit goes on diminishing.”Assumptions-Consumer is rationalUtility can be measured ,and with the help of money.Habbits,tastes and fashion remains the constant.Income remains constant.Income tax,price of commodity,remains contant.Goods have no substitute,there is no change in distribution of income
7 Exceptions of DMUAbnormal consumerPat song or poemScarce goodsMoney or wealthTime gap in consumptionUnreal sige of commidityDifference of qualityImportance of ths lawHelpful to consumerBasis to law of equimarginal utilityHelp in taxationDifference between use value and exchange valueImportance of socialistic approach pelpful In drawing a demand curve.
8 LAW OF EQUIMARGINAL UTILITY According to Dr Marshall “If a person has a thing which he can put to several uses,he will distribute it among these uses in such a way,that he has the sae marginal utility in all.”According to Prof Lipsey,”the household maximising utility,will so allocate its expenditure between commodities in such a way that the utility of the last penny spent on each is equal.”DIFFERENT NAMES OF THE LAWLaw of maximum satisfaction,law of rational consumer,law o substitution,law of economics,law of indifference,law of proportionality,etc
9 Assumptions of the law- Cardinal measurement of utility is possible.Marginal utility of money remains constantIncome of the consumer is fixed and remains constant,or the consumer has a limited amount to spend.Fashion,tastes,preferences remains constant.Commodities are divisible in small units.Consumer is rational and he wants to maximise his stisfaction.Consumption takes place at a given time period.The utilities of different goods are independent,that is gods are neither complemertry nore substitutes for one another.
10 Limitations of the lawConsumers are not fully rationalConsuer is not calculatingNonavailability of certain goodsInflunce of fashion,costoms and habitsTastes and preferences are notconstantIndivisibility of goodsIndefinifte budget priodiGnorance of consumerChange in income and pricesComplementery goodsMeasurement of goods is not possibleMarginal utility of money does remains constant.Importance of law-ConsumptionProductionExchangePrice determinationDistributionPublic financeInternational tradeDistribution of assetsDistrbution of timeSaving and investment
11 CONSUMER’S EQUILIBRIUM –UTILITY ANALYSIS Refers to a situation wherein a consumer gets maximum satisfaction out of his limited income and he has no tendency to make any changein his existing expenditure pattern.According to Marshall,”consumer equilibrium is hat state of consumers demand which he thinks to be the best and which he does not want to alter.”
12 Assumptions - Consumer is rational Cardinal measurement of utility Marginal utility of money is constantFixed income and pricesIndependent utility.tastes are constantPerfect knowledge
13 Criticism of utility analysis- Consumer is not rationalCardinal measurement of utility is not possibleMarginal utility of money does not remain constantMarginal utility cannot be estimated in all conditionsMoney is not a satisfactory measure of utilityEvery commodity is not an independent commodity or utility analysis ignored cross effect.Man is not a calculating machine or computer.No distinction between income effect and substitution effect.It does not explain Giffen paradox.Too many assumptions