1. Utility Analysis:
Consumer behavior: is the foundation of utility
Utility: is the quality or capacity of a product which enables
it to satisfy human needs and wants. It is a power to
satisfy want. The question of good or bad, ethical or
unethical are not the part of the utility.
Basic Assumptions of Utility Analysis:
i) Rational consumer: people purchase product rationally
ii) Fixed time: it deals with fixed time period
iii) Income and test: of the people is constant
iv) Independent: differ from product to product
v) MU of money: is constant; rich vs. poor money utility
vi) Introspection: differ from one people to another
vii) Ordinal vs. cardinal measurement of utility:
1,2,3, or unit based measurement is ordinal
and 1st
phase, 2nd
phase, 3dr phase is cardinal.
2. Forms of Utility:
i) Form utility: change basic structure of product (wood)
ii) Time utility: having a product available when we want
iii) Place utility: product is ready accessible to customer
iv) Possession utility: transfer the ownership
v) Information utility: when information create value
vi) Image utility: when image create value
Marginalism:
The revolution of marginal concept in the thought of
economics. Individual units, price and production are
controlled through this concept.
Law of Marginal Diminishing Utility:
The additional benefit which a person derives from a
given increase of this stock of anything diminishes with
the growth of the stock that he already has.
(Herman Heinrich Gossen).
3. Utility Schedule
Utility Total utility Average utility Marginal utility
1. 20 20 20
2. 38 18 18
3. 53 17.7 15
4. 64 11.5 11
5. 70 14 06
6. 70 11.7 00
7. 62 8.8 - 08
8. 46 5.75 - 18
i) Determination of price: Lower MU indicate high price
ii) Profit level: MU = 0, profit will be higher
iii) Production: higher total MU indicate highest production
4. quantity
A B C DO
M
D
P
Q
R
S
X
Y
50
40
30
20
p
r
i
c
e
Utility Curve
Y
O X
U
T
1 2 3 4 5
A
B
C
E
Total UtilityMarginal Utility
5. Marginal Utility of Money
Does the law of DMU apply to money? There can be a limit
to the purchase of commodity, but there is no such limit
to the acquiring the money.
A rich man attaches much less importance to each unit of
money than poor. There is a difference between a poor
spending 100 taka and a rich man spending 100 taka.
Marginal Utility and Price
Marginal utility and price are inter-related. The consumer
stops where the price and the MU are equal. Price are
not determinant of utility. If the price changes MU will
changes too. They move together.
Marginal Utility and Supply
MU is a function of supply, it varies with supply. In case of
free good, where the supply is unlimited, the MU is zero.
The greater the supply the less the MU.
6. Marginal Utility and Related Goods
a) Substitute goods: are capable to satisfy the same
want; tee and coffee or rail and road transport. The MU
of any such goods decreases as the quantity of
substitute goods with the consumer increase.
b) Complementary goods: are such goods which are
wanted together for the satisfaction for a want; paper,
pen and ink for writing. MU increases as the quantities
of the complementary goods with consumer increase.
Applications of DMU Analysis
i) Taxation: determination of individual tax fixation; richer a
person the higher is the rate of tax.
ii) Price determination: the law explains why, with
increase its supply, the value of commodity must fail.
iii) Household expenditure: we stop further purchases at
a point where marginal utility equals.
7. Applications of DMU Analysis
iv) Downward demand curve: it is this law which tells us
why demand curve slope downwards.
v) Value-in-use and value-in exchange: air has grate
utility but little value-in-exchange because it has no MU.
vi) Socialism: socialists take stand on this law when they
are advocate re-distribution of wealth in favor of poor.
vii) Basis of micro economic: some very important laws
of economics are based on DMU such as demand and
its elasticity, consumer’s surplus, law of substitution.
Paradox of Value
i) Rules:
a) Higher utility = higher price
Water has the higher utility; so its price should be high.
b) Lower utility = lower price
Diamond has the lower utility; so its price should be low.
8. ii) Paradox: the opposite of the rules
a) Higher utility = low price: water has the higher utility but
the price of water is very low.
b) Lower utility = higher price: diamond has the lower
utility but the price of diamond is very high.
iii) Analysis: the criticism of paradox value:
a) Available supply: create low utility = low price like water.
Water has the high use vale but exchange value is low.
b) Limited supply: high utility = high price like diamond
Diamond has low use vale but exchange value is very high.
Limitations
i) Suitable unites: units should be reasonable.
ii) Suitable time: time duration should be appropriate
iii) Consumer tests: hobby, music, money, literature
iv) Normal: applicable for normal situation and people
v) Constant income: if income is fluctuating
9. Limitations
vi) Limited stock: possibility of out of market
vii) Other possessing: ornaments, dress, materials
viii) Fashion: goes down, utility goes down
ix) Useless products: has no utility (Giffen goods)
Law of Equi- Marginal Utility:
i) Wants are unlimited:
a) Competitive want: possession or fashion utility
b) Less want: low priced product has less want
c) Urgent want: medicine focuses urgent want
ii) Money allocation: how the consumer would allocated
his money income among various goods.
iii) Satisfaction: distribute his income in such a way that
the utility derived from the last taka spend on each good
is equal.
10. Schedule of Equi- Marginal Utility
Taka MU of Tea MU of Cigarette
1. 10 08
2. 09 07
3. 07 06
4. 05 04
5. 03 02
• TU = 34 TU = 27
Combination: Tea & Coffee Total
1+4 10+08+07+06+04 = 35
2+3 10+09+08+07+06 = 40
3+2 10+09+07+08+07 = 41
4+1 10+09+07+05+08 = 39
11. Limitations:
i) Calculation: calculation is difficult
ii) Big expenditure: only applicable for big budget
iii) Ignorance of consumer: don’t know about substitute
iv) Irrational consumption: slaves of custom or fashion
v) Free goods: when it is unlimited
vi) Assumption: depend on some questionable assumption
Practical Uses of Equi-marginal Utility:
i) It applies to choice of consumption
ii) It applies to production
iii) It applies to exchange
iv) It applies to distribution
v) It applies to price determination
vi) It applies to public finance
