6. Importance of using TU & MU
• Paradox of value
Laws of utility analysis
• Law of diminishing marginal utility (LDMU)
7. Law of diminishing marginal utility (LDMU)
Assumptions
• Utility can be measured in cardinal system
• Marginal utility of money remains constant
• MU of every commodity is independent.
• Every unit of commodity is of same size & type.
• Consumption is continuous.
• No change in income
• No change in taste , preference
8. Law of diminishing marginal utility (LDMU)
Units consumed Marginal utility
1 4
2 3
3 2
4 1
5 0
6 -1
10. Indifference curve
“an indifference curve is a locus of all such points which
show different combinations which yield equal
satisfaction to the consumer”
11. Indifference curve analysis
Assumptions
• Customer is rational
• Consumer seeks maximum satisfaction
• Consumer is capable of ordering all possible combinations
Marginal rate of substitution
12. Properties of indifference curves
• It slopes downwards
• A higher level of indifference curve shows higher level of
satisfaction
• IDC never touches the axis
• IDC’s need not be parallel to each other
• Two IDC’s never cut each other
13. Price line or budget line
“ the price line shows the combinations of the goods that
can be purchased if the entire income is spent”
-Ferguson
15. Similarities between IDC and utility
analysis
• Both are subjective
• Both assume customer is rational
• Condition of diminishing M.U.
16. Superiority of IDC
• More realistic
• Free from the effect of independent commodity
• Free from the assumption of utility of money being
constant
• Explains income and budgetary effects
