This document discusses the concept of utility in economics. It defines utility as the satisfaction received from consuming goods and services, and how utility can vary for different individuals and over time. It then describes how utility can be measured in cardinal units and the concepts of total utility and marginal utility. The document also discusses the law of diminishing marginal utility and provides examples to illustrate consumer equilibrium.

1. CARDINAL
APPROACH

2. UTILITY
The satisfaction which a consumer gets by
having or consuming goods or service is called
utility.
Varies from: unit to unit, time to time, and
place to place for same consumer
Same commodity gives different utility to
different consumers

3. Measurement of Utility
Cardinal is a Latin word, which comes from utils
(number).
Utility can be measured in units called- cardinal
utility.
Utils are not well defined, but helps to know
consumer behavior..
Useful to distinguish between two concepts:
(1)total utility (2)marginal utility

4. Total Utility
Sum total of satisfaction
By consuming various units of commodity
More units- greater satisfaction
Saturation point- maximum total utility
Further consumption
TU starts declining

5. Marginal Utility
Change in the total utility resulting from 1 unit
change in the consumption of good.
MUx= TUx
Qx

6. Basic assumptions
Utility can be measured so,comparision can be
possible.
Utility is independent.
Constant marginal utility.
 Example..utility of money is constant
Introspection:
 it is assumed that a mind of a person works in
a similar situation.

8.  “For any individual Consumer the value that he attaches to
successive units of a particular commodity will diminish
steadily as his total consumption of that commodity
increase, the consumption of all other goods being held
constant”. (R.G.Lipsey)
 The additional benefit which a person derives from a
given increase in his stock of a thing diminishing with
every increase in stock that already he has.

9. Diagram

10. ASSUMPTIONS OF THE LAW OF DIMINISHING
MARGINAL UTILITY
• Various units of the good are homogeneous.
• There is no time gap between consumption of
the different units.
• Consumer is rational
• Tastes, preference, and fashions remain
unchanged

11. DOES MONEY BUY HAPPINESS?

12. CASE FACTS
Economist calculated the following“mean
happiness rating”
Very happy= 4
Prettey happy= 2
Not too happy= 0
In advance nations economist found that
higher incomes were positively correlated with
happiness responses which leads to
satisfaction.

13. Following two situation given when people
become happy:
Happiness is based on relative rather than
absolute income.
Happiness quickly adapts to changes in the
level of income.

14. Happiness is also based on society means as
individuals become richer, they become
happier but when society as a whole grows
richer, nobody seems happier.
This type of situation seems in advance
societies like U.S, U.K, France etc.
But in poor countries, higher incomes do make
people happier.

15. Consumer equilibrium

16. Consumer equilibrium

17. Cardinal approach

18. Recap

19. Law of diminishing marginal utility

20. Recap

23. Adverse Selection
• Averse selection is a process in which
undesired result occur when buyers and sellers
have different set of information.
• To counter the effects of adverse
selection, insurers (to the extent that laws
permit) ask a range of questions to individuals
who apply to buy insurance
so that the price quoted can be
varied accordingly, and any unreasonably high
or unpredictable risks rejected.

24. Question : What details does an insurance company require
to know before it will insure a person
to drive a car?
i. Personal Details i.e. age, height ,weight ,full
description of occupation and average monthly
income.
ii. Physical condition.[any disability or not]
iii. Habits.[like drink and drive, smoking while driving]
iv. Other or Previous insurance.
v. Previous accidents.
vi. License[full detail of it]
vii. Sum insured.
viii.Declaration

25. MORAL HAZARD
 Insurance makes less careful to company and increases
risk to the insurance company.

26. Case facts
Insurance against theft of bicycle.
Insurance increases risk to the insurance
company.
Risk analysis.

27. How to reduce moral hazard?

28. Following are used to reduce moral hazard...
A no claims bonus.
The company only being prepared to insure an
item for part of its value.
Offering lower premiums to those less likely to
claim.

29. Conclusion...

30. Case Study
on
“BISCUIT DID THE TRICK”

31. Conclusion:
This case is relate to the concept of
equilibrium of the consumer.
In equilibrium, the consumer balances the
utility of good against its cost. MU = P
Therefore, She bought a cup of coffee with a
pair of biscuits at 10 Rs.

32. Law of equi marginal utility
“A consumer maximize his total utility by allocating
his income among goods and services in such a way
that the marginal utility derive from the last rupee
spent on one goods equals to the other goods”

33. Marginal utility schedule
Units of money MU of X MU of Y
1 20 24
2 18 21
3 16 18
4 14 15
5 12 9
6 10 3

34. LIMITATION
OF THE
UTILITY ANALYSIS

35. 1. All goods under consideration and their individual
units need to be homogeneous, both qualitatively
as well as quantitatively.
2. Tastes, habits, fashions and income of the
consumer remain unchanged.
3. Consumption need to be a continuous process.
4. Marginal utility of money is assumed to be
constant.

36. Taking account of time
Can I spare time to enjoy
myself?

37. conclusion
• Opportunity cost of doing an activity is the sacrifice
of time.
• Now a days, utility of time is higher than the utility of
money.
• You have to consider relative marginal utility of
activity against relative marginal cost.