1. GOOD, UTILITY,

2. Types of Goods - Related to
Income
Inferior good: goods for which demand decreases as consumer income rises. Thus, it’s
“income elasticity” will be negative. Example: Inter-city bus service and inexpensive foods
such as, hamburger, and frozen dinners.
Normal good: goods for which demand increases as consumer income rises. Thus, it’s
“income elasticity” will be positive. Most goods are normal goods, hence the name
“normal.”
Superior good: goods that will tend to make up a larger proportion of consumption as
income rises. As such, they are an extreme form of normal good. Thus, a superior good’s
“income elasticity” will be both positive and greater than 1. A superior good might be a
luxury
good that is not purchased at all below a certain level of income, such as a luxury car.

3. Consumer Goods and Producer
Goods
Goods used for final Consumption are called
Consumer Goods
Eg. Food, Home, Car
Goods used for production of other goods are
called Producer Goods
Eg. Plants, Machinery, Factory

4. Consumer Goods
Goods which are consumed finally
Satisfy customer’s wants directly
The analysis used to study Consumed Goods is
called Demand/ Revenue analysis

5. Producer Goods
Can be used to produce Consumer goods or Producer
goods themselves

6. Arbitrary Distinction
Consumer
Good
Producer
Good

7. Non-durable goods
 According to Layman, goods perishable after use
are called non-durable goods
 Later new economics definition came ; non-
durable goods are goods perishable after one use
.Eg. Bread, Milk,
 Purchased at regular intervals
 Only current demand to be met corresponding to
current conditions
 Serviceability not generally required
 Classified into perishable and non perishable
goods

8. Perishable and non Perishable
goods
Perishable goods are lost after a period of time
Eg. Teaching Services, Doctor’s service, Medicines
Non-perishable goods are not lost after a period of
time
Eg. Coal

9. Durable Goods
Goods being used for a continued period of
time. Eg.TV, refrigerator
It either satisfies new demand or replace old
set.
Requires special facilities to use. Eg. Car needs
Petrol Pump, Refrigerator needs Electricity.
Consumed by more than one person.Eg. TV,
Radio
Serviceability is required. So segregation of new
demand and service required

10. Types of Goods - Related to
Income
Ordinary good: goods for which quantity demanded increases as
the price for the good drops; conversely, quantity demanded
decreases as the price for the good increases, (all other things
being equal).
Giffen good: a good that will experience an increase in quantity
demanded in response to an increase in price. In order to be a
true Giffen good, price must be the only thing that changes to
prompt a change in quantity demand. Conspicuous
consumption (such as found with Veblen goods) is not a factor.
The classic example is of inferior staple foods, whose demand is
driven by poverty that makes their purchasers unable to afford
superior foodstuffs. As the price of the cheap staple rises,
consumers can no longer afford to supplement their diet with
superior foods, and must consume more of the staple food.

11. Veblen goods: A good for which demand increases as
the price increases, because of its exclusive nature and
appeal as a status symbol.
A Veblen good is often also a positional good. Some types
of luxury goods, such as high-end wines, jewelry, designer
handbags, and luxury cars, are Veblen goods, in that
decreasing their prices decreases people's preference for
buying them because they are no longer perceived as
exclusive or high-status products. Similarly, a price
increase may increase that high status and perception of
exclusivity, thereby making the good even more
preferable.

12. Inferior Goods and Superior Goods
Inferior goods are goods whose demand
decreases as income increases.
It has negative elasticity of demand
Eg. A Man who had a recent hike in salary pay
less on cheap dress.
Superior gods are goods whose demand
increases as income increases
It has high positive elasticity of demand

13. The curious case of Sir Robert
Giffen
 In Ireland, the poor people used to consume more
potatoes(inferior good) and less meat using their
miniscule daily budget
 During a famine when cost of potato was
increased it was found that the consumption of
potato has been increased
 This phenomenon defied the law of demand as of
then, and was called the Giffen paradox

14. Luxury goods
In economics, a luxury good is a good for which
demand increases more than proportionally as
income rises.
It has a high elasticity of demand
Their quality, durability or performance that are
remarkably superior to the comparable substitutes Eg.
Gold ornaments
Needs good Brand Power
With time can assume status of normal goods

15. Prestige goods
Goods which ascribe high status and value
Eg. Antique Collections, Limited Edition Goods
Bought by richest section of people

16. Complementary Goods
 A good's demand is increased when the price of
another good is decreased.
It has negative cross elasticity of demand
Eg. Pencil and Eraser consumption in case of a
accounting firm.

17. Preferences
A household’s preferences determine the benefits or
satisfaction a person receives consuming a good or
service.
The benefit or satisfaction from consuming a good or
service is called utility.
Total Utility
Total utility is the total benefit a person gets from the
consumption of goods. Generally, more consumption
gives more utility.
2.Utility

18. Marginal Utility
Marginal utility is the change in total utility that
results from a one-unit increase in the quantity of a
good consumed.
As the quantity consumed of a good increases, the
marginal utility from consuming it decreases.
We call this decrease in marginal utility as the quantity
of the good consumed increases the principle of
diminishing marginal utility.
Maximizing Utility

19. Table 8.1 provides an
example of marginal
utility schedule.
Marginal utility from a
good decreases as the
quantity of the good
increases.
For example, as the
number of movies seen
in a month increases,
marginal utility from
movies decreases.
Maximizing Utility

20. Definition
The law of diminishing marginal utility describes a
familiar and fundamental tendency of human
behavior.
“The law of diminishing marginal utility states that,
“as a consumer consumes more and more units of a
specific commodity, utility from the successive units
goes on diminishing”.

21. Law based upon three facts:
The law of diminishing utility is based upon three facts.
Firstly
The wants of a man are unlimited but single want can be
satisfied. As a man gets more and more units of a
commodity, the desire of his want for that good goes on
falling. A point is reached when the consumer no longer
wants any more units of that good,
 Secondly
Different goods are not perfect substitutes for each other
in the satisfaction of various particular wants.
Thirdly
There is no change in the tastes of the consumers.

22. Example Explanation of the Law:
Suppose a person is thirsty and the price of water is zero. He takes
one glass of water which gives him great satisfaction. We can say
the first glass of water has great utility for him.
He then takes second glass of water. The utility of the second
glass of water is less than that of first glass of water. The utility
declines because the edge of his thirst has been blunted to a great
extent.
If he drinks third glass of water, the utility of the third glass will
be less than that of second and so on. The utility goes on
diminishing with the consumption of every successive glass of
water till it drops down to zero.
It is the position of consumer’s equilibrium or maximum satisfaction.
If the consumer is forced further to take a glass of water, it leads to
disutility causing total utility-to decline. The marginal utility will
become negative. A rational consumer will stop taking water at the
point at which marginal utility becomes negative even if the good
is free.
In short, when a good is free, a consumer increases consumption of a

23. The following table will make the law of
diminishing marginal utility more clear.
Units Total Utility Marginal Utility
1st
glass 20 20
2nd
glass 32 12
3rd
glass 40 8
4th
glass 42 2
5th
glass 42 0
6th
glass 39 –3

24. From the above table,
It is clear that in a given span of time :-
The first glass of water to a thirsty man gives 20 units of utility.
When he takes second glass of water, the marginal utility goes
down to 12 units.
When he consumes fifth glass of water, the marginal utility
drops down to zero and if the consumption of water is forced
further from this point, the utility changes into disutility (–3).
Here it may be noted that the utility of the successive units
consumed diminishes not because they are of inferior in quality
than that of others. We assume that all the units of a
commodity consumed are exactly alike.

25. diminishing marginal utility more
clear.

26. In the above figure,
OX we measure units of a commodity consumed and OY is shown
the marginal utility derived from them. The marginal utility of the first
glass of water is called initial utility. It is equal to 20 units. The MU of
the 5th
glass of water is zero. It is called the satiety point. The MU of
the 6th
glass of water is negative –3.
Tie MU curve here lies below the OX axis. The utility curve MM falls
from left down to the right showing that the marginal utility of the
success units of glasses of water is falling.
 When a good is scarce and so priced the consumer will increase the
consumption of a commodity up to the extent where his marginal
utility for the good equals the price which he has to pay, i.e. Mu = P.

27. Assumptions of the Law:-
These assumptions are –
Various units of goods are homogenous.
There is no time gap between consumption of the
different units.
Consumer is rational
(So aims at maximization of utility of the product)
Tastes, preferences, and fashion remain
unchanged.

31. Limitations of the law
Case of intoxicants.
(Consumption of liquor defies the law for a short period.
The more a person drinks, the more he likes it)
 Application to money.
(The law equally holds good for money. It is true that more
money the man has the more greedy)
Rare collections.
(If there are only two diamonds in the world, the
possession of 2nd
diamond will push up the marginal
utility.)
Example: collection of the rare stamps and coins

32. The Law of Equi Marginal
Utility:
1. The law of equi marginal utility explains as to how a consumer
distributes his limited income among various commodities
2. He will spend his income in such away that the last rupee spent on each
of the commodity gives him the same marginal utility.
3. Therefore, this law is known as the Law of Equi-Marginal Utility.
4. In order to get maximum satisfaction out of his limited income, the
consumer carefully weighs the satisfaction obtained from each rupee
that he spends. If he thinks that a rupee spent on one commodity has
greater utility than spending it on another commodity, he will go on
spend his money on the former till the satisfaction derived from the last
rupee spent in the two cases equal

33. Assumptions of the Law:
1. The utility is cardinally measurable.
2. The marginal utility of money remains constant.
3. Consumer has a limited amount of income and he
spends the entire amount.
4. The wants and habits of the consumer remain constant.
5. The consumer is rational. He tries to get maximum
satisfaction.
6. The consumer spends his income in small quantities
while purchasing the commodities.

34. Illustration of the Law
The law of equi-marginal utility has been stated by
Marshall as follows “If a person has a thing which can be put
to several uses, he will distribute it among the uses in such a
way that it has the same marginal utility in all”.
The law can be explained with the help of a numerical
example suppose a consumer has Rs 5/- which he wants to
spend on two types of commodities namely X and Y so that
he obtains maximum utility. The following table shows the
marginal utilities of successive rupees of income when
spends on X and Y.

35.  Figures in the brackets shows as to how
the consumer spent his Rs 5/- on two
types of commodities. Let us assume that
the price of each commodity is one
rupee. The consumer starts spending his
first rupee on X because the highest
marginal utility on X is 10 utils. In the
same way he spends his 2nd, 3rd, 4th and
5th rupee on the commodities which
gives highest utility. Thus the total utility
obtain from X and Y will be 38, i.e. from
X (10+8+6=24) and fro.m Y (8+6=14). In
this way the consumer spends his entire
income on X and Y in such way that the
last rupee spent on X and Y gives the
same marginal utility. Thus the
consumer gets maximum satisfaction
Units Mux Muy
1 10(1) 8 (2)
2 8 (3) 6 (4)
3 6 (5) 4
4 4 2
5 2 0
Total 30 20

36. Money expenditure and quantity of
demand is shown on X axis and the
marginal utility derived from the
commodities X and Y is shown on Y
axis. Marginal utility of X is shown by
the curve MUx, and marginal utility
of Y is shown by the curve MUy.
Marginal utilities of both the
commodities are equal at 6 utils. The
consumer is in equilibrium by
purchasing the combination of 3 units
of X and 2 units of Y as he obtains the
maximum total utility at that
purchase.
Equi-Marginal Utility
0
2
4
6
8
10
12
1 2 3 4 5
Quantity ofcommodities
MarginalUtility
mux
muy

37. Importance of the Law:
1. The law explains as to how a consumer maximizes his
satisfaction from his limited recourses.
2. Optimum allocation of the recourses can be possible by
applying this principle.
3. While imposing taxes, the government is cautious that the
marginal sacrifice of all the taxpayers is the same.
4. The law guides an individual in the allocation of his time
between ‘work’ and ‘leisure’.