Cardinal Utility Approach
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Transcript of Cardinal Utility Approach
What is Utility???What is Utility???
Psychological feeling of satisfaction, pleasure,
happiness which is derived from consumption,
possession or the use of a commodity is known as
utility.
Concept of UtilityConcept of Utility
Commodity AngleCommodity Angle
Consumer’s AngleConsumer’s Angle
Difference….Difference….
Commodity AngleCommodity Angle
Utility is the want satisfying Utility is the want satisfying property of a commodityproperty of a commodity ..
Utility is absolute & ethically Utility is absolute & ethically neutral in nature.neutral in nature.
Utility does not depend on Utility does not depend on the person using the the person using the commodity.commodity.
Consumer’s AngleConsumer’s Angle
Utility is the psychological Utility is the psychological feeling of satisfaction feeling of satisfaction from possession, from possession, consumption or use of a consumption or use of a commodity.commodity.
Utility is a post-Utility is a post-consumption consumption phenomenon.phenomenon.
Utility varies from person Utility varies from person to person and time to to person and time to time.time.
Cardinal utility Ordinal utility 1.Utility is cardinally
or quantitatively measurable like weight, height, length, temperature and air pressure.
2.Utility can be assigned a cardinal number like 1, 2, 3 and so on.
1.Utility is not quantitatively measurable. No absolute terms can be assigned.
2.It can be measured only in relative terms or in terms of ‘less than’ or ‘more than’.
CONCEPTS OF UTILITY
Definitions…Total Utility: Sum of the utilities derived by a consumer from the various units of goods and services he consumes is called the total utility or TU.
Marginal Utility: Addition made to total utility resulting from the consumption of one additional unit is called as marginal utility or MU.
(MUn=TUn-TUn-1)
Cardinal Utility Cardinal Utility Approach of Consumer Approach of Consumer
Behavior can be studied Behavior can be studied under:under:
Law of Diminishing Marginal Utility
Law of Equimarginal Utility
The Law of Diminishing The Law of Diminishing Marginal UtilityMarginal Utility
As the quantity consumed of a commodity increases, the utility
derived from each successive unit decreases, consumption of all
other commodities remaining the same.
No of units consumed
Total utility Marginal utility
1 12 12
2 22 10
3 30 8
4 36 6
5 40 4
6 40 0
7 38 -2
8 35 -5
Total and Marginal utility schedules
TU
MUQUANTITY
TU &
MU
Diminishing marginal utility
Why MU decreases???Why MU decreases???
When a consumer consumes additional units of a
particular good at a point of time, his desire for every successive unit becomes less intense, consequently utility derived from each successive
unit diminishes.
Assumptions to the law of Assumptions to the law of Diminishing Marginal UtilityDiminishing Marginal Utility
Various units of the goods are homogenousVarious units of the goods are homogenous
There is no time gap between consumption There is no time gap between consumption of different unitsof different units
Consumer is rational (has complete Consumer is rational (has complete knowledge and maximizes utility)knowledge and maximizes utility)
Tastes, preferences and fashions remain Tastes, preferences and fashions remain unchangedunchanged..
Cardinal Utility ApproachCardinal Utility Approach
What is consumer equilibrium?What is consumer equilibrium?
A consumer is said to have reached his A consumer is said to have reached his equilibrium position when he has maximized equilibrium position when he has maximized the level of his satisfaction with the available the level of his satisfaction with the available resources .resources .
A rational consumer consumes commodities A rational consumer consumes commodities in the order of their utilities and switches his in the order of their utilities and switches his expenditure from one commodity to the other expenditure from one commodity to the other as per their utilities.as per their utilities.
Continued…Continued…
When he reaches the stage When he reaches the stage when he no more shifts from when he no more shifts from
one commodity to the other, it one commodity to the other, it is known as is known as consumer’s consumer’s
equilibrium.equilibrium.
Consumer equilibriumConsumer equilibriumA consumer is said to be in
equilibrium (i.e. gets maximum satisfaction) if he consumes up to
the point where the marginal utility of each unit of good equals
per unit expenditure i.e MUx=Px(Mum)
AssumptionsAssumptionsRationalityRationality
Limited money incomeLimited money income
Maximization of satisfactionMaximization of satisfaction
Utility is cardinally measurableUtility is cardinally measurable
Diminishing Marginal UtilityDiminishing Marginal Utility
Continued…Continued…
Constant Marginal Utility of moneyConstant Marginal Utility of money
Utility is additiveUtility is additive
Principle of Equi-Marginal utilityPrinciple of Equi-Marginal utility
The law of Equi-Marginal Utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spent on each good is equal.
MUx
Px= MUm
Where MUm= marginal utility of money expenditure
MUx= marginal utility of good X
Px= price of X
Marginal Utility Of Goods X & YMarginal Utility Of Goods X & Y
UNITSUNITS MUx (utils)MUx (utils) MUy (utils)MUy (utils)
11 2020 2424
22 1818 2121
33 1616 1818
44 1414 1515
55 1212 1212
66 1010 99
Let the prices of goods X & Y be RS. 2 & Rs. 3 respectively. Dividing MUx by 2 and MUy by 3 we get the following table.
Again assume that the income of the consumer is Rs.24 to be spent on the two goods.
When will be the consumer in equilibrium ?
Marginal Utility Of Money Marginal Utility Of Money ExpenditureExpenditure
UNITSUNITS MUx/PxMUx/Px MUy/PyMUy/Py
11 1010 8
22 99 7
33 8 6
4 7 5
5 6 44
6 5 33
Thus the consumer will be in equilibrium when he is buying 6 units of good X and 4 units of good Y and will be spending:
(Rs. 2 * 6+ Rs. 3 * 4) = Rs.24.
Thus in equilibrium position:MUxMUx
Px=
MUy
PyMUm=
MU 3 >
MU 4 >
MU 5 > Px (MUm)
MU 6 = Px(Mum)
MUx
3 4 5 6
P
QUANTITY OF GOOD X
MA
RG
INA
L U
TIL
ITY (
Rs)
Px (Mum)
Consumer Equilibrium
Px (Mum)
Px (Mum)