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Economics: Prepared by Faisal Sultan Qadri

Utility refers to the satisfaction or benefit derived from consuming goods and services. There are two approaches to measuring utility - the cardinal and ordinal approaches. The cardinal approach treats utility as a quantifiable element that can be measured, while the ordinal approach treats utility as relative rankings of preferences. Consumer equilibrium is reached when a consumer maximizes total utility subject to a budget constraint, choosing the bundle of goods that provides the highest total utility per unit of currency spent.

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36 views

Economics: Prepared by Faisal Sultan Qadri

Utility refers to the satisfaction or benefit derived from consuming goods and services. There are two approaches to measuring utility - the cardinal and ordinal approaches. The cardinal approach treats utility as a quantifiable element that can be measured, while the ordinal approach treats utility as relative rankings of preferences. Consumer equilibrium is reached when a consumer maximizes total utility subject to a budget constraint, choosing the bundle of goods that provides the highest total utility per unit of currency spent.

Uploaded by

adnanahmar
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Economics

Prepared by Faisal Sultan Qadri


uTILITY

It is the property of an object to produce pleasure, well-being or happiness


Jeremy Bentham (1748-1831)

Utility is the subjective pleasure or usefulness that a person delivers from


consuming a good or service.

Utility is the measure of satisfaction, associated with the consumption of


goods and services.
Cardinal Utility Approach
 Cardinal utility approach treats Coke Total Marginal
utility as a measurable and Utility Utility
quantifiable element like weight,
Height, Distance, Volume, Etc. 0 0 -
1 10 10
 Total utility is the sum of the
satisfaction associated with the 2 15 5
consumption of several units of a
commodity(Commodities). 3 18 3
4 19 1
 Marginal utility is the change in
the total utility due to the 5 19 0
consumption of an additional unit
of commodity. 6 17 -2
Consumer Equilibrium
Statement: I would much rather have a BMW instead of my Suzuki FX
If I want to maximize my utility, why don’t I buy a BMW?

!!! Because it costs a lot more than the FX So if I want to maximize my


utility, I don’t just pick the thing that gives me the most pleasure. I have
to weigh the price of the good in my decision as well

So how can I compare a BMW and a SUZUKI? It’s like comparing


apples and oranges. Instead, I need to somehow make them both
comparable.
In order to do that I will need to convert utility to utility
per Rupee. This way, I can see that even though the BMW
gives me more utility, I get more utility per Rupee from the
FX. So if I want to spend my money wisely, I buy the thing
that gives me more utility per Rupee.
• Let’s say I walk down to the cafeteria for lunch and they have
Pizza and Ice Cream.

• The pizza is Rs.1 a slice and the Ice Cream is Rs.2 a scoop. I have
Rs.7 in my pocket What do I buy?

• Remember, I want to choose the combination of pizza and Ice


Cream that gives me the greatest possible utility for my $7

• Consider the following table, which states the total utility I get
from all possible quantities of Pizza and Ice Cream
Utility Table

Pizza
Ice Cream
Quantity Total Util. Marginal Util. Total Util. Marginal Util.

0 0 -- 0 --
1 24 24 29 29
2 44 20 46 17
3 60 16 56 10
4 70 10 58 2
5 72 2 59 1
6 72 0 59 0

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