The document discusses the concept of utility, beginning with its introduction by William Stanley Jevons and further development by Carl Menger and Leon Walras. It defines utility as the amount of satisfaction derived from consuming a commodity, noting that utility is subjective. It then discusses the characteristics of utility, the concepts of total utility, marginal utility, and their relationship. Finally, it contrasts the cardinal and ordinal approaches to utility analysis, explaining the law of diminishing marginal utility, law of equi-marginal utility, and indifference curve analysis under the ordinal approach.

1. UTILITY ANALYSIS

2. UTILITY
 Background:
The concept of utility was introduced for the first time
by “WILLIAM STANLEY JEVONS” (1834-1882) of great Britain.
further worked by “CARL MENGER” & “LEON WALRAS”
According to them:
“utility is a subjective concept on the
basis of which people demand a commodity”.

3. UTILITY
 Definition:
In objective terms, utility may be defined as
the “amount of satisfaction derived from a commodity or
service at a particular time”.
 Meaning:
Utility may not be confused with usefulness
as it is purely subjective satisfaction derived from the
consumption of a commodity.
 Example: water has the ability to slake thirst, pen has
ability to write.

4. UTILITY
Characteristics of utility:
 Dependent upon human wants.
 Immeasurable.
 Utility depend upon use.
 Utility is subjective.
 Utility depends upon shape.
 Utility depends upon on knowledge.
 Utility depends upon ownership.

5.  Initial Utility- Satisfaction Derived from very first unit
consumed of any object.
 Total Utility – Total Satisfaction derived from the
product.
 Marginal Utility- The word Marginal means “Border” or
“Edge”.
It is the addition made to the total utility by
consuming one more unit of a commodity.
 Relationship between Total Utility, and Marginal Utility.
CONCEPTS OF UTILITY

6. RELATION BETWEEN TU & MU
Quantity TU MU Description
0 0 --
1 8 8 Initial
2 14 6
3 18 4 Positive
4 20 2
5 20 0 Zero
6 18 -2 Negative

7. CARDINAL & ORDINAL APPROACH

8. Cardinal Utility Analysis and Ordinal Utility Analysis
Cardinal Utility analysis Ordinal Utility Analysis
Utility Analysis
• Alfred Marshal
• can be measured
• „Utils‟
• Law of Diminishing
Marginal Utility
•Law of Equi-marginal Utility
• J. R. Hicks & R.G.D. Allen
•Cannot be measured but
compared as rank
• Indifference Curve analysis

9. CARDINAL AND ORDINAL UTILITY
 Cardinal Utility: The numbers 1, 2, 3, 4 are cardinal numbers.
For example the number 2 is twice the size of 1. In the same way,
the number 4 is four times the size of number 1.
 Alfred Marshall developed cardinal utility analysis.
 According to cardinal approach, utility can be measured.
 The exponents of the utility analysis have developed two laws which
occupy a very important place in economics theory and they are :-
 Law of Diminishing Marginal Utility
 Law of Equi-Marginal Utility

10. LAW OF DIMINISHING MARGINAL UTILITY
 H.H Gossen was the first economist to explain the law of
diminishing marginal utility, and the law of equi marginal
utility in 1854.
 W.S Jevons named them as Gossen first and second
laws of consumption (1871).
 In 1890 Marshall in his “Principle of Economics” developed
this analysis in a refined manner.
 Alfred Marshall defines the „Law of Diminishing Marginal
Utility‟ as “The additional benefit which a person derives
from a given increase of his stock of a thing diminishes with
every increase in the stock that he already has.”

11. LAW OF DIMINISHING MARGINAL UTILITY
 Statement:
“If other things do not change and a
consumer increases the use of a commodity, the
utility of every new unit of the commodity will be less
than the utility of the previous unit.”

12. DIAGRAM & TABLE EXPLANATION
The Law of Diminishing Marginal
Utility
-5
0
5
10
15
20
25
30
35
1 2 3 4 5 6 7
X goods
Total/MarginalUtilities
X Units Total
Utility
Marginal
Utility
1 10 -
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
TUC
MUC

13. Assumptions:
 All the units of a commodity must be
same in all respects.
 The unit of the good must be standard.
 There should be no change in taste
during the process of consumption.
 There must be continuity in
consumption.
 There should be no change in the price
of the substitute goods.
LAW OF DIMINISHING MARGINAL UTILITY

14. Exceptions:
 Money
 Hobbies
 Rare Things
 Liquor
 Music
 Things of Display
LAW OF DIMINISHING MARGINAL UTILITY

15. THE LAW OF EQUI MARGINAL UTILITY:
 Gossen Second Law
DEFINTION:
 The law of equi marginal utility explains as to how a consumer
distributes his limited income among various commodities.
 Consumer will spend his income in such away that the last
rupee spent on each of the commodity gives him the same
marginal utility.
 Therefore, this law is known as the Law of Equi-Marginal
Utility.

16. Units Mux Muy
1 10(1) 8 (2)
2 8 (3) 6 (4)
3 6 (5) 4
4 4 2
5 2 0
Total 30 20
0
2
4
6
8
10
12
1 2 3 4 5
MarginalUtility
Quantity of commodities
Equi-Marginal Utility
THE LAW OF EQUI MARGINAL UTILITY:

17. EXCEPTION OF LAW:
 Fashion
 Ignorance
 Indivisible
 Time Factor

18. ORDINAL UTILITY
Ordinal utility:
 The numbers 1st, 2nd, 3rd, and 4th, are ordinal
numbers. These ordinal numbers are ranked or
ordered. This ranking does not explain the actual size
relation of the numbers. The second one might or
might not be twice as big as the first one.
 Hicks and Allen used ordinal utility approach for
analyzing the consumer behavior.
 This analysis is known as indifference curve analysis.
The Indifference Curve:
An indifference curve is the locus of infinite
combinations of two commodities which yield the
same total utility to the consumer.

19. INDIFFERENCE CURVE AND TABLE
COMBINATI
ON
Good X
(tea)
Good Y
(coffee)
A 1 15
B 2 10
C 3 6
D 4 3
E 5 1
0
2
4
6
8
10
12
14
16
0 2 4 6
Indiffence Curve

20. Thank You…