The document outlines the principles of microeconomics, focusing on consumer behavior and the concept of utility. It discusses utility's definitions, the laws of diminishing marginal utility, and equi-marginal utility, explaining how consumers maximize satisfaction with limited income across various goods. Additionally, it addresses the relationship between marginal utility and price, applications of these principles in taxation, price determination, and economic theory, as well as the paradox of value.

1. © INTEGRAL UNIVERSITY
BM115 –Micro Economics
FOR BBALLB & BA LLB
Mr. Shahab Ud Din
Assistant Professor
DCBM
9580624322

2. Syllabus
THEORY OF CONSUMER BEHAVIOR
• Concept of utility, Cardinal utility, Law of diminishing marginal utility,
Law of Equi-marginal utility, Indifference curve analysis, Marginal rate
of substitution, Budget line, Consumer' equilibrium, Applications of
indifference curves.

3. Consumer behavior is the foundation of utility

4. UTILITY
DEFINITION
The term was introduced initially as a measure of pleasure or
satisfaction
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.

5. • A Utility function that represents a consumer's preference ordering
over a choice set. It is devoid of its original interpretation as a
measurement of the pleasure or satisfaction obtained by the
consumer from that choice.

6. 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.

8. Marginalism
The revolution of marginal concept in the thought of economics.
Individual units, price and production are controlled through this
concept.

9. 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.

11. 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

13. 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 Rs and a rich
man spending 100 Rs

14. 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.

15. 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

16. 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.

17. 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 to zero

18. 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.

19. 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.

20. 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.

21. 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
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)

22. Law of Equi- Marginal Utility:
• The idea of equi-marginal principle was first mentioned by H.H.Gossen
(1810-1858) of Germany. Hence it is called Gossen's second Law. Alfred
Marshall made significant refinements of this law in his 'Principles of
Economics'.
• The law of equi-marginal utility explains the behaviour of a consumer when
he consumers more than one commodity.
Wants are unlimited but the income which is available to the consumers to
satisfy all his wants is limited. This law explains how the consumer spends his
limited income on various commodities to get maximum satisfaction
. The law of equi-marginal utility is also known as the law of substitution or
the law of maximum satisfaction or the principle of proportionality between
prices and marginal utility.

23. 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.

24. Schedule of Equi- Marginal Utility
Rupees 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

25. 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

26. 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