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.
Initial utility-utility derived from 1 st unit of a commodity,eg,1 st 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 quantity Marginal 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=un Relation between total utility and marginal utility. Assumptions of utility analysis-
UTILITY ANALYSIS Cardinal measurement of utility: Utility is additive. Independent utilities. Marginal utility of money remains constant Introspection. 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.
CONCEPTS OF UTILITY- There are two concepts of utility- Total utility(TU) Marginal utility(MU)
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 rational Utility 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
Exceptions of DMU Abnormal consumer Pat song or poem Scarce goods Money or wealth Time gap in consumption Unreal sige of commidity Difference of quality Importance of ths law Helpful to consumer Basis to law of equimarginal utility Help in taxation Difference between use value and exchange value Importance of socialistic approach pelpful In drawing a demand curve.
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 LAW Law of maximum satisfaction,law of rational consumer,law o substitution,law of economics,law of indifference,law of proportionality,etc
Assumptions of the law- Cardinal measurement of utility is possible. Marginal utility of money remains constant Income 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.
Limitations of the law Consumers are not fully rational Consuer is not calculating Nonavailability of certain goods Influnce of fashion,costoms and habits Tastes and preferences are notconstant Indivisibility of goods Indefinifte budget priod iGnorance of consumer Change in income and prices Complementery goods Measurement of goods is not possible Marginal utility of money does remains constant. Importance of law- Consumption Production Exchange Price determination Distribution Public finance International trade Distribution of assets Distrbution of time Saving and investment
CONSUMERS 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.
Assumptions - Consumer is rational Cardinal measurement of utility Marginal utility of money is constant Fixed income and prices Independent utility.tastes are constant Perfect knowledge
Criticism of utility analysis- Consumer is not rational Cardinal measurement of utility is not possible Marginal utility of money does not remain constant Marginal utility cannot be estimated in all conditions Money is not a satisfactory measure of utility Every 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