managerial econimics 22
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MANAGERIALANAGERIAL
ECONOMICSCONOMICS
:resented by:resented by
( / / )shwani Kumar 10 PMB 019( / / )shwani Kumar 10 PMB 019.vnish Kr Chauhan.vnish Kr Chauhan
( / / )0 PMB 021/ / )0 PMB 021
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Ø Marginal Utility
Ø Indifference CurveØ Budget Line
Ø Consumer Equilibrium
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, ‘ ’In economics the term utility is used to denote that quality of a commodity or service by virtue
.of which our wants are satisfied
,In other words“ a n t sa t is fy in g p o w e r o f a g oo d is c a l l e d
. ”t i l i t y
This is assumed to be measured in terms of, , , , .cardinal numbers such as 1 2 3 4 etc These numbers are called utils or units of utility
HE CONCEPT OF UTILITY HE CONCEPT OF UTILITY
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t is the additional utility on account of the onsumption of an additional unit of a
.ommodity
o r ex am p l e If a 10 units of a commodity yield,satisfaction of 100 utils and 11 units of a commodity
,yield satisfaction of 105 utils then the additional utility on account of consumption of 11th unit of the
:commodity is
- = .05 100 5 utils.This is called marginal utility
HE CONCEPT OF HE CONCEPT OF ARGINAL UTILITYARGINAL UTILITY
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EASUREMENT OF MARGINAL EASUREMENT OF MARGINAL UTILITTILIT
( )he Marginal Utility MU is measured:s under
=MU TUn – TU -n 1
Referring to the above example=MU TU11 – TU10
= – = .105 100 5 utils
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ILLUSTRATILLUSTRATIONN
.able 1 Gives an illustration on the estimation of T U and .U
onsumption of
ommodity X[ ]nits
TUX
MUX12345
100190270340400
[00 TU - TU0= -00 0
= ]00[0 TU - TU1= - =90 100
]0[0 TU - TU2= - =70 190
]0 [0 TU - TU3= - =40 270
]0[0 TU - TU4= - =00 340
]0
:h e ta b le s ho w s
. =U TU n – TU -1
. =U ∑ = [ + + + + ] = .U 100 90 80 70 60 400
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IAGRAMATIC PRESENTATIONIAGRAMATIC PRESENTATION
onsumption of X( )nits
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NDIFFERENCE NDIFFERENCE URVE URVE
APPROACHPPROACH
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RDINAL RDINALUTILITYTILITY
, ,As Utility is subjective its measurement is not.possible in real life So there is an alternative
approach developed by economists known as r d i n a l
t i l i t y t h e o r y , which deals with the consumers
behavior under the assumption that utility from different units of good or between different goods
need only be a n k a b l e .and not measurable
:For example If a consumer gets more utility from
bundle A
than from bundle B
,it means that consumer
will rank bundle A above bundle B .
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. :a t i o n a l i t y A consumer aims to maximize his( )utility subject to income and prices under condition of certainty
.2. :o m p l e t e O r d e r i n g All possible combination of
,goods can be ordered into preferred indifferent or inferior combinations when compared to a given
combination of the good.4. :o n s i s t e n c y This Condition requires that if a
, ,consumer prefers bundle A to bundle B he does not
,at the same time prefers bundle B to Bundle to A.6. :r a n s i t i v i t y If a consumer prefers bundle A to
,bundle B and bundle B to C he prefers bundle A to bundle C
.8
. - :o n s a t i e t y A bigger bundle is preferred to a smaller bundle
EATURES EATURES
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NDIFFERENCE CURVE NDIFFERENCE CURVE
A curve that shows different combination of two goods yielding the same level of utility to consumer is known
( – ).as Indifference Curve Equal utility Curve
,Since all points on the curve yield equal satisfaction,the consumer likes equally all the combinations and is
, .therefore indifferent between these combinations
COMBINATION Unit of Good X Unit of Good Y
AB
C
D
E
12
3
4
5
3024
19
15
12
Indifference
Schedule
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U N
I T S
O F
Y
UNITS OF X
An Indifference Curve
Indifference Curve
N INDIFFERENCE CURVE N INDIFFERENCE CURVE
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UDGET LINE UDGET LINE
R R-SO-SO
XPENDITURE XPENDITURE
LINEINE
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A consumer's budget line characterizes on a graph the maximum amounts of goods that the consumer can.afford
UDGET LINE OR UDGET LINE OR-SO EXPENDITURE LINE SO EXPENDITURE LINE
( ) ( )a p r ef e re n ce f o r th a t g oo d a nd ii
.u r c h a si ng p ow er t o b u y t h e g o o d His preference,pattern is represented by a set of indifference curves while his purchasing power depends upon his money
.income and market prices of the goods
=Qx .
P +Q y . P y
where E = ;Expenditure on goods X and Y
Q x and Q =Quantity of Good X and Y
;respectively and=
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udget Line
t of Good X
nit of Good Y
ffordable ffordable
ot Affordable ot Affordable
HE BUDGET HE BUDGETLINEINE
/Py
/Py
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:Let a consumer has= . ,Rs 2000
P = .s 50 and
Py = . .s 40
The maximum amount of X which he can be found fromhis
:budget equation = (000 50 Qx) + ( )0 0 or Qx =40
Similarly we find the maximum amount of Q
y=50
So the combination ( , )0 0 and ( , )50 are possible
consumption bundles within the budgeted amount of.many By joining these two points in graph we get the
.budget line AB
ILLUSTRATIONLLUSTRATION
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’ONSUMER S ONSUMER SEQUILIBRIUMQUILIBRIUM
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’ONSUMER S EQUILIBRIUM ONSUMER S EQUILIBRIUM
,In consumer equilibrium you allocate income between the purchase of different goods in such a way that you cannot
, ,increase your level of utility that is you have achieved.utility maximization
:etermination of consumer equilibrium.If there is only two good A and B The consumer knows the
prices A and B and has a fixed budget that can be used to.purchase quantities of A and B The consumer will purchase
quantities of A and B so as to completely exhaust the
.budget for such purchases The actual quantities purchased of each good are determined by the condition for consumer, :equilibrium which is
a r g i n a l U t i l i t y O f A M a r g i n a l a r g i n a l U t i l i t y O f A M a r g i n a l
t i l i t y O f B t i l i t y O f B
r i c e O f A r i c e O f A
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*
*
C
E
D
G
F
B
A
I4
I3I2
I1
’ONSUMER S ONSUMER SEQUILIBRIUMQUILIBRIUM
U
N I T S
O F
Y
UNITS OF X
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nits ofA
U of A /U Price of A nits of B U of B /U Price ofB
1
2
3
4
24
18
12
6
12
9
6
3
1
2
3
4
9
8
5
1
9
8
5
1
ILLUSTRATION
= . ,rice of A Rs 2= . ,rice of B Rs 1
= .udget Rs 5
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