presentation on utility and indifference curve analysis with a precise and complete information..

2. Utility is a term used by economists to describe the
measurement of "useful-ness" that a consumer obtains from
any good.
it is the want satisfying power of any commodity or capacity of
a commodity to give satisfaction.
For eg:
Ram’s mother needs to take Ram to school. She can
either walk or drive. Ram's mother considers the benefits of
exercise and fresh air, which compose the utility she would
derive from walking, and also considers the time savings and
comfort of driving, so after that Ram's mother decides to drive.

3. There are basically two principal theories for the utility :
cardinal utility and
ordinal utility.
 Cardinal utility: Many traditional economists hold the view that utility is
measured quantitatively, i.e. 1, 2, 3 ,length, height, weight, temperature, etc.
They expand ‘Util‘ to Units of utility and They assumed that one util is equal to
one unit of money so they said that we can measured it in quantitative form
This concept is known as cardinal utility concept. Here we uses marginal
utility analysis.
 Ordinal utility: it is propounded by the modern economists, J.R. Hicks, and
R.G.D. Allen, which states that it is not possible for consumers to express the
satisfaction derived from a commodity in absolute or numerical terms the
measurement of utility is ordinal, i.e. qualitative, based on the ranking of
preferences for commodities. Here we uses indifference curve analysis..
For example: Suppose a person prefers tea to coffee and coffee to milk. Hence, he
or she can tell subjectively, his/her preferences, i.e. tea > coffee > milk

4. Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a
good or service.
Two types of marginal utility are:
Positive marginal utility is when the consumption of an additional item increases the total utility.
Negative marginal utility is when the consumption of an additional item decreases the total utility.
Law of Diminishing Marginal Utility:
"Other things remaining the same when a person takes successive units of a commodity, the
marginal utility diminishes constantly".
The marginal utility of a commodity diminishes at the consumer gets larger quantities of it.
Assumptions:
Following are the assumptions of the law of diminishing marginal utility:
 The utility is measurable and a person can express the utility derived from a commodity in
qualitative terms such as 2 units, 4 units and 7 units etc.
 It is necessary that a standard unit of measurement is constant
 The taste of the consumer remains same during the consumption o the successive units of
commodity.
 Income of the consumer remains constant during the operation of the law of diminishing
marginal utility

5. Units of
commodity
Marginal
utility
Total utility
1st glass 10 10
2nd glass 8 18
3rd glass 6 24
4th glass 4 28
5th glass 2 30
6th glass 0 30
7th glass -2 28
Explanation With Schedule and Diagram:
We assume that a man is very thirsty. He takes the glasses of water successively. The
marginal utility of the successive glasses of water decreases, ultimately, he reaches the point
of satiety. After this point the marginal utility becomes negative, if he is forced further to take
a glass of water. The behavior of the consumer is indicated in the following schedule:
1 2 3 4 5 6 7
MU 10 8 6 4 2 0 -2
TU 10 18 24 28 30 30 28
10
8
6
4
2
0
-2
10
18
24
28
30 30
28
-5
0
5
10
15
20
25
30
35
Utility
Units
Chart Title
MU TU

6. Exceptions or Limitations:
The limitations or exceptions of the law of diminishing marginal utility are as follows:
1.The law does not hold well in the rare collections. For example, collection of ancient
coins, stamps etc.
2.The law is not fully applicable to money.
3.It does not apply to the knowledge, art and innovations.
4.The law is not applicable for precious goods.
5.Historical things are also included in exceptions to the law.
6.Law does not operate if consumer behaves in irrational manner. For example,
drunkard is said to enjoy each successive peg more than the previous one.

7. Properties of IC
1.Indifference curve slope downwards to right:
When a consumer wants to have more of a commodity, he/she will have to give
up some of the other commodity, given that the consumer remains on the same
level of utility at constant income. As a result, the indifference curve slopes
downward from left to right.

8. Indifference curve is convex to the origin
According to diminishing marginal rate of substitution, the rate of
substitution of commodity X for Y decreases more and more with each
successive substitution of X for Y.
Table: Indifference schedule
Combination Cigarette Coffee
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2
We can clearly see that the rate of decrease in
consumption of coffee is not the same as rate of
increase in consumption of cigarette

9. Indifference curve cannot intersect each other
The level of satisfaction of consumer for any given combination of two
commodities is same for a consumer throughout the curve. Thus, indifference
curves cannot intersect each other.
According to indifference curve theory, satisfaction
at point C = satisfaction at point A
Also, satisfaction at point C = satisfaction at point B
But, satisfaction at point B ≠ satisfaction at point A.
Therefore, two indifference curves cannot intersect.
Yet, two indifference curves need not be parallel to
each other.

10. Higher indifference curve represents higher level of
satisfaction
Higher the indifference curves, higher will be the level of satisfaction. This
means, any combination of two goods on the higher curve give higher level of
satisfaction to the consumer than the combination of goods on the lower
curve.