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# Utility and cardinal utility analysis

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### Utility and cardinal utility analysis

1. 1. SEMINAR PresentationUtility and Cardinal Utility analysis BA Economics Programme Faris K.V. Muhammed Noufal Muhammed Jaseel Jamsheed P.T. SAFI Institute of Advanced Study, Vazhayoor
2. 2. ContentsI. Introduction to Utility Analysis a) Meaning of Utility b) Cardinal Utility analysis and Ordinal Utility Analysis c) Total Utility and Marginal UtilityII. Cardinal Utility a) Assumptions of Cardinal Utility analysis b) Law of Diminishing Marginal Utility c) Law of Equal-Marginal UtilityIII. Critical evaluation of Cardinal Utility analysisIV. Conclusion
3. 3. 1. Introduction to Utility Analysisa) Meaning of Utilityb) Cardinal Utility analysis and Ordinal Utility Analysisc) Total Utility and Marginal Utility
4. 4. Meaning of Utility
5. 5. I. Introduction to Utility Analysis Meaning of Utility Utility means - The power of a commodity that satisfy the wants of consumer - want satisfying power Introduced by Jermy Bentham Measurement ‘Utils’ Subjective entity
6. 6. Cardinal Utility analysis and Ordinal Utility Analysis
7. 7. Cardinal Utility analysis and Ordinal Utility Analysis Utility AnalysisCardinal Utility analysis Ordinal Utility Analysis • Alfred Marshal • J. R. Hicks & R.G.D. Allen • can be measured •Cannot be measured but compared • ‘Utils’ as rank • Law of Diminishing Marginal • Indifference Curve analysis Utility • Quantitative . Subjective entity or Personal •Law of Equi-marginal Utility •Mashellian Analysis
8. 8. Total Utility(TU) and Marginal Utility(MU)
9. 9. Total Utility(TU) and Marginal Utility(MU) Unit of Total Marginal•Total Utility is the sum utility derived from Mango Utility Utilitythe consumption of bundle of commodity 1 10 2 20 3 29•Marginal Utility is the rate of change of TU 4 37from one more unit of extra consumption 5 43 6 48 7 51 8 52 MUn = TUn – TUn-1 9 52 10 50 MU =∆TU/∆Q
10. 10. Total Utility(TU) and Marginal Utility(MU) Unit of Total Marginal•Total Utility is the sum utility derived Mango Utility Utilityfrom the consumption of bundle of 1 10 10commodity 2 20 10 3 29 9 4 37 8•Marginal Utility is the rate of change 5 43 6 6 48 5of TU from one more unit of extra 7 51 3consumption 8 52 1 9 52 0 MUn = TUn – TUn-1 10 50 -2 MU =∆TU/∆Q
11. 11. I. Introduction to Utility Analysis a) Meaning of Utility b) Cardinal Utility analysis and Ordinal Utility Analysis c) Total Utility and Marginal UtilityII. Cardinal Utility a) Assumptions of Cardinal Utility analysis b) Law of Diminishing Marginal Utility c) Law of Equal-Marginal UtilityIII. Critical evaluation of Cardinal Utility analysisIV. Conclusion
12. 12. 2. Cardinal Utility Analysisa) Assumptions of Cardinal Utility analysisb) Law of Diminishing Marginal Utilityc) Law of Equal-Marginal Utility
13. 13. Assumptions of Cardinal Utility analysis
14. 14. Assumptions of Cardinal Utility analysis1. Rationality of consumer2. Cardinal measurability of utility3. Marginal Utility of Money is constant4. Diminishing Marginal Utility5. Utility is Additive – TU= Ux+ Uy+ Uz+…….+ Un6. The hypothesis of Independent Utility7. Introspective method
15. 15. Law of Diminishing Marginal Utility Gossen First law
16. 16. Law of Diminishing Marginal Utility• Gossen first law•According to Alfred Marshall ‘the additional utility which a person derivefrom the consumption a commodity diminishes, that is Total Utility increaseat an diminishing rate ‘
17. 17. Law of Diminishing Marginal Utility ‘the additional utility which a person derive from the consumption a commodity diminishes, that is Total Utility increase at an diminishing rate ‘ Unit of Total Marginal Mango Utility Utility 1 10 2 20MUn = TUn – TUn-1 3 29 4 37MU =∆TU/∆Q 5 43 6 48 7 51 8 52 9 52 10 50
18. 18. Law of Diminishing Marginal Utility‘the additional utility which a person derive from the consumption a commodity diminishes, that is Total Utility increase at an diminishing rate ‘ Unit of Total Marginal Mango Utility Utility 1 10 10 2 20 10 3 29 9 4 37 8 5 43 6 6 48 5 7 51 3 8 52 1 9 52 0 10 50 -2
19. 19. Law of Diminishing Marginal Utility ‘the additional utility which a person derive from the consumption a commodity diminishes, that is Total Utility increase at an diminishing rate ‘Unit of Total MarginalMango Utility Utility TU 1 10 10 TU 2 20 10 3 29 9 4 37 8 No of mango 5 43 6 6 48 5 7 51 3 MU 8 52 1 9 52 0 10 50 -2 No of mango MU
20. 20. Law of Diminishing Marginal Utility Saturation Point MU =0 or TU is maximumTU TU No of mangoMU No of mango MU
21. 21. Application of Law of Diminishing Marginal Utility
22. 22. Application of Law of Diminishing Marginal Utility1. Bases of law of demand- why demand curve slops downward2. Law of equi- marginal utility is derived3. Consumer surplus derived4. Progressive Tax can be justified5. Water-diamond paradox resolve
23. 23. Law of Equal-Marginal UtilityConsumer’s Equilibrium under Marshellian analysis (Goosen’s Second Law)
24. 24. Law of Equal-Marginal Utility Consumer’s Equilibrium under Marshellian analysis•Gossen Second Law•Explain how consumer is maximize his satisfaction by allocating his income withdifferent commodity at various prices. • Condition for consumer equilibrium two commodity MUx/ = MUy/ = MU m Px Py • Condition for consumer equilibrium more commodity MUx/ = MUy/ = ……………………. MUn/P n = MU m Px Py
25. 25. Law of Equal-Marginal Utility Consumer’s Equilibrium under Marshellian analysisCondition for consumer equilibrium MUx/ = MUy/ =MUm Px Py Apple (A) MUA MU/PA Banana (B) MUB MU/PB 1 60 20 1 60 12 2 48 16 2 55 11 3 42 14 3 50 10 Apple – 5 Rate 15 Rupees 4 36 12 4 45 9 Banana – 3 Rate 15 Rupees 5 30 10 5 40 8 6 24 8 6 35 7 7 18 6 7 20 4Price of A = 3 Price of B =5 MU of Money = 10 Expenditure = 5x Price of A + 3 X Price B = 5 x 3 + 3 X 5 = Rs.30
26. 26. Law of Equal-Marginal Utility Consumer’s Equilibrium under Marshellian analysis•Gossen Second Law•Explain how consumer is maximize his satisfaction by allocating his income withdifferent commodity at various prices. Marginal Utility MU Apple MU Banana9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 Unit of A Unit of B
27. 27. Critical evaluation of Cardinal Utility analysis
28. 28. Critical evaluation of Cardinal Utility analysis• Utility is not Cardinally measurable• Marginal Utility of money is not constant• Inadequacy of methods of introspection• Utilities are n interdependence• Failure to explain Giffen Paradox• Failure to distinguish income effect and substitution effect
29. 29. Conclusion
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