1. UTILITY ANALYSIS
Utility is the Power of a Commodity to satisfy human wants.
There are two different Approaches to Utility Analysis
Cardinal approach to utility analysis
Ordinal approach to utility analysis

2. Assumptions of the Cardinal Marginal Utility
CARDINAL APPROACH
This School believes that Utility is Measurable and is a Quantifiable entity.
Cardinal Approach gives exact measurement by assigning definite numbers such as 1, 2, 3, etc.
Assumptions of the Cardinal Marginal Utility
Cardinal Measurement of Utility
Utilities are Independent
Constant Marginal Utility of Money
Introspection

3. TOTAL AND MARGINAL UTILITY
Total Utility is the sum total of the units of utility which an individual derives from the consumption of a commodity during a specified period of time.
Marginal Utility is the change in the total utility resulting from a one-unit change in the consumption of a commodity per unit of time.
Marginal Utility is the addition made to the total utility by the consumption of the last unit considered just worthwhile.
MU = Change in Total Utility
Change in Quantity Consumed

4. Total & Marginal Utility Relationship
Total Utility starts increasing by decreasing ratio while Marginal Utility starts decreasing.
When Total Utility is at its maximum point and thereafter starts decreasing, Marginal Utility comes to zero.
After the maximum point has been achieved by total utility it starts decreasing which causes marginal utility to become negative.

5. LAW OF DIMINISHING MARGINAL UTILITY
The German Economist H. Gossen who was first to explain the law said that “As the consumer consumes more and more units of a commodity, the utility from the successive units goes on diminishing”.
Marshall explains the law as “The additional benefit, which a person derives from an increase of his stock of a thing, diminishes with every increase in the stock that he already has”.

6. TOTAL & MARGINAL UTILITY
Units
Total utility
Marginal utility 1 10 2 15
5 (15-10) 3 19
4 (19-15) 4 22
3 (22-19) 5 23
1 (23-22) 6
0 (23-23) 7 21
-2 (21-23)

7. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
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8. LIMITATIONS OF THE LAW Suitable Units Suitable Time
No Change in Consumer’s Taste
Rationality
Rare Collections
Change in Our & Other Peoples’ Stock
Fashion
Not Applicable to Money

9. APPLICATIONS OF LAW OF DIMINISHING MARGINAL UTILITY
Helps in Taxation
Price Determination
Household Expenditure
Basis of law of Demand
Socialists View
Consumer’s Surplus Concept

10. LAW OF EQUI-MARGINAL UTILITY
It is an extension of the law of Diminishing Marginal Utility to two or more commodities.
Given the income of a consumer, the law states that consumer can get maximum satisfaction when the Marginal Utility of the last rupee spent on each commodity yield the same utility.
To get maximum satisfaction, consumer will substitute one good for another.
It is also called as Law of Substitution, Law of Indifference, or Law of Maximum Satisfaction.

11. LAW OF EQUI-MARGINAL UTILITY
Under Law of Equi-marginal utility consumer equilibrium can be stated in the following formula.
MUx = MUy = …… MUn
Px Py Pn

12. EXAMPLE
Suppose consumer is buying two Goods X and Y and marginal utility of them are given as
Suppose the prices of good X & Y are Rs. 3 & Rs.4 respectively and total income is Rs.20. The above table can be reconstructed by dividing the marginal utilities of good X by Rs. 3 and marginal utilities of good y by Rs. 4.
Units of X & Y
MU x
MU y 1 33 36 2 30 32 3 27 28 4 24 5 21 20 6 18 16

13. The Resulting Marginal Utility Table
Units of Money
MU x
P x
MU y
P y 1 11 9 2 10 8 3 7 4 6 5

14. LIMITATIONS OF THE LAW Rationality Effects of Fashion and Customs
Ignorance
Indivisible Units
Questionable Assumptions

15. PRACTICAL IMPORTANCE OF THE LAW
Applications to Consumption
Applications to Production
Applications to Exchange
Price Determination
Applications to Distribution

16. JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM.
FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA.
COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA.
CONTACT:
R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.