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Managerial Economics & Business Economics

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Managerial Economics & Business Economics
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

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