Utility refers to the satisfaction or want-fulfilling capacity of a product. There are two types of utility analysis: cardinal and ordinal. Utility is subjective, relative, and independent of morality. The total utility of consuming more of a product increases at a decreasing rate, following the law of diminishing marginal utility. Indifference curves show combinations of goods that provide equal satisfaction to a consumer. A consumer reaches equilibrium where their highest indifference curve is tangent to their price line or budget constraint. Indifference curve analysis is superior to traditional utility analysis as it is more realistic and free of some restrictive assumptions.

1. UTILITY-the want
satisfying capacity of a
product is called utility.
Types of utility

Cardinal utility analysis

Ordinal utility analysis

2. Features of utility:
• Utility is subjective
• Utility is relative
• Utility is not essentially useful
• Utility is independent of morality

3. Utility concepts
• Initial utility
• Total utility
TU=f(Qx)
• Marginal utility
MU=Tn-(Tn-1)

4. Types of marginal utility
• Positive marginal utility
• Zero marginal utility
• Negative marginal utility

5. Total & marginal utility
Quantity Total utility Marginal utility
MU = Tux-TU x-1
0 0
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 -2

6. Importance of using TU & MU
• Paradox of value
Laws of utility analysis
• Law of diminishing marginal utility (LDMU)

7. Law of diminishing marginal utility (LDMU)
Assumptions
• Utility can be measured in cardinal system
• Marginal utility of money remains constant
• MU of every commodity is independent.
• Every unit of commodity is of same size & type.
• Consumption is continuous.
• No change in income
• No change in taste , preference

8. Law of diminishing marginal utility (LDMU)
Units consumed Marginal utility
1 4
2 3
3 2
4 1
5 0
6 -1

9. Exceptions
• Rare things
• Misers
• Deficiency of the product
• Habitual consumption (addiction)

10. Indifference curve
“an indifference curve is a locus of all such points which
show different combinations which yield equal
satisfaction to the consumer”

11. Indifference curve analysis
Assumptions
• Customer is rational
• Consumer seeks maximum satisfaction
• Consumer is capable of ordering all possible combinations
Marginal rate of substitution

12. Properties of indifference curves
• It slopes downwards
• A higher level of indifference curve shows higher level of
satisfaction
• IDC never touches the axis
• IDC’s need not be parallel to each other
• Two IDC’s never cut each other

13. Price line or budget line
“ the price line shows the combinations of the goods that
can be purchased if the entire income is spent”
-Ferguson

14. Consumer’s equilibrium (IDC
analysis)
Income effect
Price effect

15. Similarities between IDC and utility
analysis
• Both are subjective
• Both assume customer is rational
• Condition of diminishing M.U.

16. Superiority of IDC
• More realistic
• Free from the effect of independent commodity
• Free from the assumption of utility of money being
constant
• Explains income and budgetary effects