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Chpter 2

1. A consumer is defined as someone who makes decisions about what to purchase to satisfy wants, either as an individual or as a member of a household. 2. Utility refers to the want-satisfying power of a good. Cardinal utility advocates that utility can be measured in numerical units, while ordinal utility holds that preferences can only be ranked, not measured numerically. 3. The law of diminishing marginal utility states that as consumption of a good increases incrementally, the additional utility derived from each additional unit decreases. It is illustrated using a utility schedule that shows marginal utility declining as total utility rises until it reaches a maximum, then declines.

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56 views4 pages

Chpter 2

1. A consumer is defined as someone who makes decisions about what to purchase to satisfy wants, either as an individual or as a member of a household. 2. Utility refers to the want-satisfying power of a good. Cardinal utility advocates that utility can be measured in numerical units, while ordinal utility holds that preferences can only be ranked, not measured numerically. 3. The law of diminishing marginal utility states that as consumption of a good increases incrementally, the additional utility derived from each additional unit decreases. It is illustrated using a utility schedule that shows marginal utility declining as total utility rises until it reaches a maximum, then declines.

Uploaded by

shobhit mishra
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© © All Rights Reserved
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1.

Consumer The one who takes decisions about what to buy for the satisfaction of
wants, both as an individual or as a member of a household, is called a consumer.

2.Utility The want satisfying power of a good is called utility.

3.Cardinal Measurement of Utility It is that concept of utility which advocates that utility
can be measured in terms of units like 2, 4, 6, 8, etc.

In other words, utility is measurable in standard numerical units, known as‘utils’.

4.Ordinal Measurement of Utility According to this utility cannot be measured in


numerical units, a consumer can (at best) rank his preferences in the sets of most
preferred to least preferred sets.

5.Total Utility (TU) It is the sum total of Marginal Utilities derived from the consumption
of all the units of a commodity.
TU = MUX + MU2+….+MU„ or sum of MU

6.Marginal Utility (MU) It refers to additional utility on account of the consumption of an


additional unit of a commodity.
MU=TUn –TUn-1 Where, MU = Marginal Utility
TUn = Total Utility at n units; TUn-1= Total Utility at (n – 1) units.

7.Relationship between Total Utility (TU) and Marginal Utility (MU)


(i)When MU is positive (+), TU rises.
(ii)When MU is zero (0), TU is maximum.
(iii) When MU is negative (-), TU starts declining.

8.Law of Diminishing Marginal Utility The law states that as more and more standard
units of a commodity are continuously consumed, Marginal Utility derived from each
successive units goes on diminishing. It is also called fundamental law of satisfaction

9.Assumptions of Law of Diminishing Marginal Utility


(i)Cardinal measurement of utility.
(ii)Price of the good remain constant.
(iii) Income of the consumer do not change,
(iv) Consumption should be continuous and of some standard units.

10.Law of Equi-marginal Utility The law states that in order to maximise their
satisfaction a consumer must spend his money on two goods in such a manner that the
ratio of Marginal Utility of a commodity to its price becomes equal to the ratio of
Marginal Utility of other commodity to its price

where X and Y are two commodities.


Expert Shiksha Shobhit Mishra
8130071900
pg. 1
Define utility. (Compartment 2014, Foreign 2014, Ail India 2010,2006)
Ans. The wants satisfying power of a good is called utility.

Define Marginal Utility (MU). (AllIndia2011)


Ans. Marginal Utility (MU) refers to additional utility on account of the consumption of an
additional unit of a commodity.
MU=TUn-TUn_1                                                                              ‘
Where, MU = Marginal Utility, TU = Total Utility

Explain the Law of Diminishing Marginal Utility with the help of a utility schedule.
(Delhi 2013)
  or
Explain the Law of Diminishing Marginal Utility with the help of a Total Utility
schedule.   (All India 2011; Delhi 2010)
Ans. It is the fundamental Law of Utility approach to consumer’s equilibrium. This law
states that as more and more standard units of a commodity are continuously consumed,
the Marginal Utility obtained from each successive unit goes on diminishing.

This law is also called as a ‘Fundamental Law of Satisfaction’ or ‘Fundamental


Psychological Law’.

The above schedule shows that with the consumption of successive unit of a commodity,
the level of satisfaction falls and becomes negative or in other words, MU tends to decline
as consumption of the commodity increases.

The above law is based upon certain assumptions.


1.It is assumed that the different unit consumed should be identical in all respects
2.consumption should be continuous.

Explain the difference between cardinal utility and ordinal utility. Give example.   (All
India 2012)
Ans. Difference between cardinal utility and ordinal utility
Expert Shiksha Shobhit Mishra
8130071900
pg. 2
UNITS CONSUMED TOTAL UTILITY (TU) MARGINAL UTILITY (MU)

1 30 30

2 56 26

3 76 20

4 88 12

5 90 2

6 90 0

7 86 -4

8 78 -8

relationships between total utility and marginal utility:

Expert Shiksha Shobhit Mishra


8130071900
pg. 3
 When the marginal utility is positive, total utility is increasing (from unit 1 to 5).
 When the marginal utility is zero, total utility is maximum (At 6th unit).
 When marginal utility is negative, total utility is decreasing (Unit 7 & 8)

Expert Shiksha Shobhit Mishra


8130071900
pg. 4

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