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Utility Approach
Dr.Meenakshi Anand
Utility
“The utility of a thing to a person at a
time is measured by the extent to
which it satisfies his wants”
Prof. Marshall
“The satisfaction that some one
receives from consuming
commodities is called his utility.”
Prof. Lipsey
Utility may be defined as want
satisfying power of a commodity or
service.
It is not concerned with the usefulness
or harmfulness of a commodity.
Characteristics of Utility
Utility is Measurable
Utility is Relative
Utility Depends on Intensity of want
Utility is Subjective
Utility is concern, with consumer goods
only
Inter personal comparison is not
possible
Measurement of Utility
There are two type of approaches:-
Cardinal approach – according to this
utility is measurable. It implies that
utility can be added, subtracted and
compared. It is expressed in terms of
numbers i.e.1,2,3..
Ordinal approach – according to this
an individual is observed to prefer one
choice over another. The preference
can be ordered from most satisfying to
least like I, II, III, IV..
Types of Utility
Total utility – is the summation of
utilities obtained by the consumer from
different units of a commodity.
Marginal utility – the change that takes
place in the total utility by the
consumptions of an additional unit of a
commodity is called Marginal Utility.
Law of Diminishing
Marginal Utility
“The additional benefit which a person
derives from a given increase of his
stock of a thing diminishes with every
increase in stock that he already has”
Prof. Marshall
Other things being equal, the marginal
utility of a good diminishes as more of
it is consumed in a given time period. It
is also known as first law of GOSSEN.
Units T.U M.U
1 10 10
2 17 7
3 19 2
4 19 0
5 16 -3
Total Utility
0
50
100
150
200
1 2 3 4 5 6 7 8 9 10 11
($) M U
-20
-10
0
10
20
30
40
50
1 2 3 4 5 6 7 8 9 1 11
ASSUMPTIONS
Law of Diminishing Marginal
Utility
All the units of the commodity should
be homogenous.
Suitable quantity of consumption.
Continuity in consumption.
Want should be a single one and not
multiple.
Income, habit ,taste of the consumer do
not change.
Price of commodity should be constant.
Exceptions of the Law
 Consumption of very small units
 Rare Commodities and Antiques
 Classical music, gazals, poems etc.
 Alcoholic Drinks
 Personal Hobbies
 Complementary Goods
Significance of Law
 Base for all other laws of Economics
 Basis of Production
 Basis of Public Finance
 Basis of Innovations
 Basis of theory of Price determination
 Basis of wealth Distribution
It is called fundamental law of
satisfaction
THANK YOU

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Law of diminishing marginal utility

  • 2. Utility “The utility of a thing to a person at a time is measured by the extent to which it satisfies his wants” Prof. Marshall “The satisfaction that some one receives from consuming commodities is called his utility.” Prof. Lipsey
  • 3. Utility may be defined as want satisfying power of a commodity or service. It is not concerned with the usefulness or harmfulness of a commodity.
  • 4. Characteristics of Utility Utility is Measurable Utility is Relative Utility Depends on Intensity of want Utility is Subjective Utility is concern, with consumer goods only Inter personal comparison is not possible
  • 5. Measurement of Utility There are two type of approaches:- Cardinal approach – according to this utility is measurable. It implies that utility can be added, subtracted and compared. It is expressed in terms of numbers i.e.1,2,3.. Ordinal approach – according to this an individual is observed to prefer one choice over another. The preference can be ordered from most satisfying to least like I, II, III, IV..
  • 6. Types of Utility Total utility – is the summation of utilities obtained by the consumer from different units of a commodity. Marginal utility – the change that takes place in the total utility by the consumptions of an additional unit of a commodity is called Marginal Utility.
  • 7. Law of Diminishing Marginal Utility “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in stock that he already has” Prof. Marshall Other things being equal, the marginal utility of a good diminishes as more of it is consumed in a given time period. It is also known as first law of GOSSEN.
  • 8. Units T.U M.U 1 10 10 2 17 7 3 19 2 4 19 0 5 16 -3 Total Utility 0 50 100 150 200 1 2 3 4 5 6 7 8 9 10 11 ($) M U -20 -10 0 10 20 30 40 50 1 2 3 4 5 6 7 8 9 1 11
  • 9. ASSUMPTIONS Law of Diminishing Marginal Utility All the units of the commodity should be homogenous. Suitable quantity of consumption. Continuity in consumption. Want should be a single one and not multiple. Income, habit ,taste of the consumer do not change. Price of commodity should be constant.
  • 10. Exceptions of the Law  Consumption of very small units  Rare Commodities and Antiques  Classical music, gazals, poems etc.  Alcoholic Drinks  Personal Hobbies  Complementary Goods
  • 11. Significance of Law  Base for all other laws of Economics  Basis of Production  Basis of Public Finance  Basis of Innovations  Basis of theory of Price determination  Basis of wealth Distribution It is called fundamental law of satisfaction