Economics Chapter II.pptx

Zeal Group of Management Institutes
Course Name : Economic Analysis for Business Decisions
Chapter II :
Utility and Demand
Analysis
Prof. Shriram Ugale

Utility
Utility refers to the comprehensive benefits
obtained from consuming an item or service.

Origin of Utility
•In economics, Daniel Bernoulli was a prominent 18th-century
Swiss mathematician
•He defined the term "utility". Since then, the theoretical
economic perspective has advanced, resulting in numerous
monetary values.
•The amount to which an economic good or product benefits a
consumer's demand or need determines its utility

Utility Analysis
• He primary goal is to maximize satisfaction from the
goods and services he purchases with his income
• To achieve the highest level of satisfaction, a consumer
must follow certain rules or principles since resources are
limited in nature in comparison to limitless demands

Types Of Utility
• Form Utility
•Time Utility
•Place Utility
•Price Utility
•Possession Utility

Cardinal Utility
• In economics, utility simply means the satisfaction that
a consumer experiences from a product or service
• Cardinal utility is an attempt to quantify and abstract
concept because it assigns a numerical value to utility
• Cardinal utility assigns a number to the utility, such as a
basket of apples gives a utility of 10 and a Bushel of corn
is 20.

Marginal Utility
• Marginal utility is the added satisfaction a consumer
gets from having one more unit of a good or service.
• The concept of marginal utility is used by economists to
determine how much of an item consumers are willing to
purchase.
• Marginal utility can be positive, zero, or negative.

Measurement of Utility
• Economists measure utility by observing customer choices
• Utility can be measured in Two Ways
1. Cardinal Utility
2. Marginal Utility
• Cardinal Utility assigns a number to Utility such as 30 utils
for basket of apple
• Marginal utility change in utility from consuming one
additional unit such 4 utils for another apple after 3 apple

Law of Diminishing Marginal Utility
• The law of diminishing marginal utility states that the
satisfaction level decreases with the increase in the
unit of a product/service consumed

Indifference Curve

Budget Line

Consumer Equilibrium
• A situation where a consumer spends his
given income purchasing one or more
commodities so that he gets maximum
satisfaction
• He has no urge to change this level of
consumption, given the prices of
commodities, is known as the consumer’s
equilibrium.

Consumer Equilibrium

Demand
• Consumer's desire to purchase goods and
services and willingness to pay a specific
price for them

Determinates of Demands
• Price of the product
• Distribution of Income and wealth in the
commodity
• Community common habits and scale of
preferences
• General Standard of living
• Spending Habits

• Number of buyers in the market
• Age structure and sex ratio of population
• Future expectations
• Level of taxation and tax structure
• Inventions and Innovations
• Fashions

• Climate or weather conditions
• Customs and Culture
• Advertisement and sale propoganda

Demand Schedule
The tabular statement that shows different
quantities of a commodity that all the
consumers are willing and capable to
purchase at different levels of prices

Demand Curve
A demand curve represents the relationship
between the price of a good or service and
the quantity demanded for a given period of
time

Types of Demand

Law of Demand
• Explain how market economies allocate
resources and determine the prices of goods
and services that we observe in everyday
transactions.
“It states that the quantity purchased varies
inversely with price”

Law of Demand
• Higher the price, the lower the quantity
demanded. This occurs because of diminishing
marginal utility.
• Consumers use the first units of an economic
good they purchase to serve their most urgent
needs first and use each additional unit of the
good to serve successively lower-valued ends.

Demand Function
• Algebraically, the market function of demand is described as follows:
• Dx = f (Px, Y, Py, Ep, T, Pp, A, U)
• The demand of Commodity x (Dx)
• The function of commodity x (f)
• Price of good or service (Px)
• Incomes of buyers (Y)
• Prices of related goods & services (Py)
• The Expected future price of the product (Ep)
• Taste patterns of users (T)
• Number of buyers in the market (Pp)
• Distribution of Income (A)
• Government Policy (U)

Exceptions to the law of demand

Elasticity of Demand
• The elasticity of demand refers to the degree
to which demand responds to a change in an
economic factor

Elasticity of Demand

Price Elasticity of Demand
• Price elasticity of demand is the ratio of the
percentage change in quantity demanded of a
product to the percentage change in price

Types Price Elasticity of Demand

Income Elasticity of Demand
•Income elasticity of demand describes the
sensitivity to changes in consumer income
relative to the amount of a good that
consumers demand

Income Elasticity of Demand

Cross Elasticity of Demand

Cross Elasticity of Demand
•The cross elasticity of demand is an economic
concept that measures the responsiveness in the
quantity demanded of one good when the price
for another one changes.

Demand Forecasting

Economics Chapter II.pptx

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