Managerial Economics & Business Economics

Only available on StudyMode
  • Download(s) : 183
  • Published : April 4, 2013
Open Document
Text Preview
THE UTILITY CONCEPT

THE term utility refers to satisfaction a consumer gets from whatever goods and services he consumes. It will be useful to discuss between two utility concepts: (i) total utility (ii) marginal utility

Total utility attained from a commodity refers to the sum total of satisfaction which a consumer receives by consuming the various units of the commodity. The more units he consumes, the greater will be his total satisfaction upto a certain point. As he keeps on increasing the consumption of the commodity, he eventually reaches a point of satisfaction that is of maximum satisfaction.

Marginal utility of a good is defined as the change in the total utility resulting from one unit change in the total consumption.

THE LAW OF DIMINISING MARGINAL UTILITY

The cardinalist school assumes that utility of a commodity can be expressed in terms of numerical units. According to this law, for any individual consumer the value that he attaches to successive units of a particular commodity will diminish steadily as his total consumption of that commodity increases, the consumption of all other goods being held constant.

In other words, as the consumer consumes more, his total utility will increase but at a diminishing rate. The assumptions are that

i) Various units of the good are homogeneous

ii) There is no time gap between consumption of the different nits

iii) Consumer is rational

iv) Tastes, preferences and fashions remain unchanged

v) Money is the measuring rod of utility of a commodity and money itself has constant utility

The consumer is in equilibrium (gets maximum total utility) if he consumes up to the point where the marginal utility of the good equals the market price of the good.

The consumer maximises his total utility by allocating his income among goods and services available to him in such a way that the marginal utility per rupee’s worth of one good equals the marginal utility per rupee’s of any other good.

This law believes that the utility, though subjective, could be measured or quantified on the basis of the price which a consumer wishes to pay for the product. If he is willing to pay Rs. 50 for the bottle of pepsi cola, that means he expects to derive satisfaction worth that amount. But as he consumes more of it at the same time, the additional amount of satisfaction i.e., marginal utility, goes on falling and therefore, the amount he wishes to pay to pay for subsequent pepsi cola, shall also be lower.

There is one more interesting concept of consumer surplus. Which is the difference between the amount of money or price, which the consumer is willing to pay and the price which he actually pays.

LIMITATIONS OF THE THEORY

i) All goods under consideration and their individual units need to be homogeneous

ii) Tastes, habits, fashions and income of the consumer remain unchanged

iii) Consumption need to be a continuous process. Different units of the good should be consumed in succession at a particular point of time

iv) Marginal utility of money is assumed to be constant

MEANING OF DEMAND

Demand for a commodity refers to the quantity of the commodity which an individual household is willing to purchase per unit of time at a particular price. Demand for a commodity implies:

i) Desire of the consumer to buy the product

ii) Sufficient purchasing power in his possession to buy the commodity

DEMAND FUNCTION

Demand for a commodity, per unit of time, by a consumer depends upon:

i) Price of the commodity

ii) Price of substitutes and complementary goods

iii) Income of the household

iv) Tastes and preferences

v) Publicity expenses

LAW OF DEMAND

The law of demand states that the amount demand of a commodity and its price are inversely related ,...
tracking img