The satisfaction which a consumer gets by
having or consuming goods or service is called
Varies from: unit to unit, time to time, and
place to place for same consumer
Same commodity gives different utility to
Measurement of Utility
Cardinal is a Latin word, which comes from utils
Utility can be measured in units called- cardinal
Utils are not well defined, but helps to know
Useful to distinguish between two concepts:
(1)total utility (2)marginal utility
Sum total of satisfaction
By consuming various units of commodity
More units- greater satisfaction
Saturation point- maximum total utility
TU starts declining
Change in the total utility resulting from 1 unit
change in the consumption of good.
Utility can be measured so,comparision can be
Utility is independent.
Constant marginal utility.
Example..utility of money is constant
it is assumed that a mind of a person works in
a similar situation.
“For any individual Consumer the value that he attaches to
successive units of a particular commodity will diminish
steadily as his total consumption of that commodity
increase, the consumption of all other goods being held
The additional benefit which a person derives from a
given increase in his stock of a thing diminishing with
every increase in stock that already he has.
ASSUMPTIONS OF THE LAW OF DIMINISHING
• Various units of the good are homogeneous.
• There is no time gap between consumption of
the different units.
• Consumer is rational
• Tastes, preference, and fashions remain
Economist calculated the following“mean
Very happy= 4
Prettey happy= 2
Not too happy= 0
In advance nations economist found that
higher incomes were positively correlated with
happiness responses which leads to
Following two situation given when people
Happiness is based on relative rather than
Happiness quickly adapts to changes in the
level of income.
Happiness is also based on society means as
individuals become richer, they become
happier but when society as a whole grows
richer, nobody seems happier.
This type of situation seems in advance
societies like U.S, U.K, France etc.
But in poor countries, higher incomes do make
• Averse selection is a process in which
undesired result occur when buyers and sellers
have different set of information.
• To counter the effects of adverse
selection, insurers (to the extent that laws
permit) ask a range of questions to individuals
who apply to buy insurance
so that the price quoted can be
varied accordingly, and any unreasonably high
or unpredictable risks rejected.
Question : What details does an insurance company require
to know before it will insure a person
to drive a car?
i. Personal Details i.e. age, height ,weight ,full
description of occupation and average monthly
ii. Physical condition.[any disability or not]
iii. Habits.[like drink and drive, smoking while driving]
iv. Other or Previous insurance.
v. Previous accidents.
vi. License[full detail of it]
vii. Sum insured.
Insurance makes less careful to company and increases
risk to the insurance company.
Insurance against theft of bicycle.
Insurance increases risk to the insurance
This case is relate to the concept of
equilibrium of the consumer.
In equilibrium, the consumer balances the
utility of good against its cost. MU = P
Therefore, She bought a cup of coffee with a
pair of biscuits at 10 Rs.
Law of equi marginal utility
“A consumer maximize his total utility by allocating
his income among goods and services in such a way
that the marginal utility derive from the last rupee
spent on one goods equals to the other goods”
Marginal utility schedule
Units of money MU of X MU of Y
1 20 24
2 18 21
3 16 18
4 14 15
5 12 9
6 10 3
1. All goods under consideration and their individual
units need to be homogeneous, both qualitatively
as well as quantitatively.
2. Tastes, habits, fashions and income of the
consumer remain unchanged.
3. Consumption need to be a continuous process.
4. Marginal utility of money is assumed to be
Taking account of time
Can I spare time to enjoy
• Opportunity cost of doing an activity is the sacrifice
• Now a days, utility of time is higher than the utility of
• You have to consider relative marginal utility of
activity against relative marginal cost.