Utility

The Utility (The Basis of Consumer Demand)

Utility is the power or property of a commodity to satisfy human needs.Utility is ethically neutral.

(Alcoholism, drugs, smoking etc.)

1. WOULD YOU GET THE SAME SATISFACTION FROM A CUP OF COFFEE AND A CAN OF Coke ON A HOT SUMMER DAY?

HOW ABOUT A COLD WINTER DAY?

AT DIFFERENT TIMES.

DIFFERENT ITEMSWILL GIVE DIFFERENT UTILITYIN DIFFERENT SITUATIONS

CONCLUSION

NO NO

OBJ 1 DEFINE THE CONCEPT OF UTILITY

2. WOULD TWO PEOPLE GET THE SAME SATISFACTION FROM THE SAME ITEM?

PERSON LEAVING A BANQUET?

WOULD A CANDY BAR HAVE THE SAMEUTILITY FOR A HOMELESS PERSON AND

DIFFERENT PEOPLEWILL HAVE DIFFERENT UTILITY

FOR THE SAME ITEM

CONCLUSION

OBJ 1 DEFINE THE CONCEPT OF UTILITY

Total Utility

Sum of the utilities derived by a consumer from the various units of goods and services he/she consumes.

Tux = u1 + u2 + u3 + u4

Tun = ux + uy + uz

Marginal UtilityUtility derived from the marginal unit consumed.

OrAdditional to the total utility resulting from the

consumption of one additional unit.Or

Refers to the change in the Total Utility (TU) obtained from the consumption of an additional unit of a commodity.

MU = TU Q

TU = Total Utility, Q = Change in quantity consumed by one unit.

MU of nth Unit = TUn – TUn-1

The Law of Diminishing Marginal 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.

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MarginalUtility

Total Utility

No. of Units Demanded

Diminishing Marginal Utility

Assumption: Theory of Diminishing M.U.

Unit of the consumer good must be a standard one.

Consumer’s taste or preference must remain the same during the period of consumption.

There must be continuity in consumption. Mental Condition of the consumer must

remain normal.

What is DEMAND??? Desire to buy Willingness to Pay Ability to Pay

Depends on: Utility Value in Exchange

Demand for a commodity has always a reference to a “Price” a “Period of Time” and a “Place”.

Demand Demand is the quantity of a commodity

which a consumer is willing and able to purchase at any given price, during some specific period of time.

Determinants of Demand

1. The price of the product in question.

2. The income available to the household.

• A household’s decision about the quantity of a particular output to demand depends on:

Determinants of Demand

3 The prices of other products (substitutes and complements) available to the household.

4. The household’s tastes and preferences.5. The household’s expectations about future

income, wealth, and prices.6. Population7. New Discoveries8. Climate and Weather9. Savings10. Reduction in Taxes

Demand schedule :

A demand schedule is a table showing how much of a given product a household would be willing to and able to buy at different prices.

Demand curves are usually derived from demand schedules.

PRICE (PER CALL)

QUANTITY DEMANDED (CALLS PER

MONTH)$ 0 30

0.50 253.50 77.00 3

10.00 115.00 0

ANNA'S DEMAND SCHEDULE FOR

TELEPHONE CALLS

Demand schedule :

1. Individual Demand Schedule2. Market Demand Schedule

Individual Demand Schedule

PRICE (PER CALL)

QUANTITY DEMANDED (CALLS PER

MONTH)$ 0 30

0.50 253.50 77.00 3

10.00 115.00 0

ANNA'S DEMAND SCHEDULE FOR

TELEPHONE CALLS

Market Demand Schedule

Price of Milk (Rs.)

Demand for Mr. X (Kg.)

Demand for Mr. Y (Kg.)

Market Demand (Kg.)

5 1 2 1+2 = 34 2 3 2+3 = 53 3 4 3+4 = 72 4 5 4+5 = 91 5 6 5+6 = 11

: Demand curve

The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices.

PRICE (PER

CALL)

QUANTITY DEMANDED (CALLS PER

MONTH)$ 0 30

0.50 253.50 77.00 3

10.00 115.00 0

ANNA'S DEMAND SCHEDULE FOR

TELEPHONE CALLS

Assumption of Law of Demand

We use “all else equal” device, to examine the relationship between the quantity demanded of a good per period of time and the price of that good, while holding income, wealth, other prices, tastes, and expectations constant.

The Law of Demand Price and Quantity Demanded:

The law of demand states that there is a negative, or inverse, relationship between price and the quantity of a good demanded and its price.

• This means that demand curves slope downward.

Two Views

for every possible price, it shows the quantity demanded

for each unit of item, it shows the maximum price that the buyer is willing to pay

Demand Curve: Slope

Due to diminishing marginal benefit demand curve slopes downward

Shift of Demand VS.Movement Along a Demand Curve

• A change in demand is not the same as a change in quantity demanded.

• A higher price causes lower quantity demanded and a move along the demand curve DA.

• Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.

A Change in Demand VS.a Change in Quantity Demanded

To summarize:

Change in price of a good or service leads to

Change in quantity demanded(Movement along the curve).

Change in income, preferences, orprices of other goods or services

leads to

Change in demand(Shift of curve).

The Impact of a Change in Income

• Higher income decreases the demand for an inferior good

• Higher income increases the demand for a normal good

The Impact of a Changein the Price of Related Goods

• Price of hamburger rises

• Demand for complement good (ketchup) shifts left

• Demand for substitute good (chicken) shifts right

• Quantity of hamburger demanded per month falls

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