Utility and indifference analysis

Utility and Indifference curve analysis: 

Utility and Indifference curve analysis By. Nischay. K. Upamannyu

Definition of Utility: 

Definition of Utility Definition: According To Javones “Utility refer to abstract quality whereby an object serves our purpose”. According To Hidden “Utility is that quantity of good to stisfy a want”. According To Robinson “Utility is the quality in commodities that makes individual want to buy them”.

Meaning of Utility: 

Meaning of Utility The term utility in economic is used to denote that quality in a commodity or service by virtue of which our want are satisfied. In other word, want and satisfying power of good is called utility. “It is power of commodity which satisfy need and want of the customer”.

Feature of Utility: 

Feature of Utility Utility is subjective:- As it deal with the mental satisfaction of human being. A good and service may have different utility to different person. Exp-Liquor has utility for alcoholic not for others. Utility is Relative;- As a utility of a commodity never remain the same. It vary with time and place. Exp- Cooler has utility in summer not during winter season. Utility is not essentially useful:- A commodity having utility need not to be useful. Exp- Liquor and cigarettes are not useful but if these things satisfy the want of addict so Liquor and cigarettes have utility.

PowerPoint Presentation: 

Utility is independent of morality:- it has nothing to do morality. Use of liquor may not be proper form moral point of view, but as these thing, satisfy the intoxicants need and want.

Type of Utility: 

Type of Utility Initial Utility:- The utility is derived from the first unit of commodity is called initial utility. It is obtained from the consumption of the first unit of a commodity. It is always positive. Total Utility:- The aggregate of utility obtained from the consumption of different unit of a commodity, is called total utility. Marginal Utility:- The changes that take place in the total utility by the consumption of an additional unit of commodity is called marginal utility.

Type of marginal utility: 

Type of marginal utility Positive marginal utility:- if by consuming additional units of commodity, total utility goes on increasing than marginal utility of these units will be positive. exp- Liquor Zero Marginal utility:- If the consumption of additional unit of commodity does not impact in the total utility. It means the marginal utility of additional unit is zero. Exp- additional right shoes have zero marginal utility without more left shoes. Negative Utility:- If the consumption of an additional unit of a commodity cause fall in total utility. It means the marginal utility is negative.

Table :- Show total utility, marginal utility: 

Table :- Show total utility, marginal utility Quantity Total Utility Marginal utility Description 0 0 8-0 =8 Initial utility 1 8 14-8 =6 Positive utility 2 14 18-14 =4 3 18 20-18 =2 4 20 20-20 =0 Zero Utility 5 20 18-20 =-2 Negative utility 6 18

Measurement of utility: a quantification of satisfaction of wants and needs achieved through the consumption of goods and services: 

Measurement of utility : a quantification of satisfaction of wants and needs achieved through the consumption of goods and services There are two method for measuring utility Cardinal utility :-cardinal utility, which is based on numerical value (1,2,3,4,5……).when utility is measured on the basis of cardinal utility so it is checked that what amount of money a consumer is willing to pay for a good and service. Ordinal Utility :-Ordinal utility, which is based on raking (firs, second, third, fourth, five ………). In this method utility is expressed in utils.

Criticism on the measurement of utility: 

Criticism on the measurement of utility It has been criticized by Prof. Simuelson as the value of money because money keep changing therefore utility can not be measured definitely in the terms of money.

Law of Diminishing marginal utility: 

Law of Diminishing marginal utility Law of diminishing marginal utility is the foundation stone of utility analysis. Law of diminishing marginal utility stated that as the quantity consumed of a commodity increases, the utility derived form each successive unit decrease and this law applies to all kind of consumer goods-Durable and non-durable- sooner and later. Exp- if some one buy a pen so the utility of pen will be highest but as he keep on buying pen and increase the no. of pen so the utility of the pen would automatically be reduced. It apply also real life of human being.

Table of Total and Marginal utility Schedules: 

Table of Total and Marginal utility Schedules No. of unit consumed Total Utility Marginal Utility 1 2 3 4 5 6 30 50 60 65 60 45 30 20 10 5 -5 -15

Graph Presentation : 

Graph Presentation 70 60 50 40 30 20 10 0 -10 1 2 3 4 5 6 7 TU MU

Why Does the MU Decrease?: 

Why Does the MU Decrease ? The utility gained form a unit of a commodity depend on the intensity of the desire for it. When a person consume successive unit of commodity, his need is satisfied by degree in the process of consumption, and the intensity of his need goes on decreasing therefore the utility obtained from each successive unit goes on decreasing.

Definition:-: 

Definition:- According to Marshall “the additional benefit which a person derives form given stock of thing diminishes with every increases in the stock that he already has”. According to Champion “the more we have thing, the less we want additional increments of it or more we want not to have additional increment of it.” According to Samuelson “as the amount consumed of good increase the marginal utility of a good tends to decrease”. it is clear from the above definition that at a given time when we go on consuming additional unit of a commodity, the marginal utility from each successive unit of that commodity, other thing being equal, goes on diminishing in relation to the preceding unit.

Assumption of Law of Diminishing marginal utility: 

Assumption of Law of Diminishing marginal utility The unit of the consumer good must be a standard, one Exp- a cup of tea, bottled of cold drink, a pair of shoes or trousers, etc. it the units are excessively small or large, the law may not be applied. Consumer taste or preference must be remain the same during the period of consumption otherwise law of diminshing marginal utility may not be applied.

PowerPoint Presentation: 

There must be continuity in consumption. Where break in continuity is necessary, the time interval between the consumption of two units must be appropriately short. Mental condition of the consumer must remain normal during the period of consumption.

Explanation- the law can be explained with the help of the table and figure below.: 

Explanation- the law can be explained with the help of the table and figure below. UNIT Total Utility Marginal utility Glass 20 20 Glass 32 12 Glass 40 8 4 Glass 42 2 Glass 42 0 Glass 39 -3

PowerPoint Presentation: 

50 40 30 20 10 0 -5 1 2 3 4 5 6 TU MU

Exception: 

Exception Curious and Rare thing- Law does not apply to rare or curious thing like person who collect old and rare coins, postage stamps as increasing managerial utility as the stock of these rare article goes an increasing. They are alawys keen to obtain more & more unit of such thing. Misers- It seem law does not apply to misers who is curious to acquire more and more wealth. Their desire for money seem to be instable

PowerPoint Presentation: 

Good book or Poem :- It is said that by reading a good book or listening to melodious song and a beautiful poem again and again on gets more utility than before. Intoxicated thing- It is said that the desire of intoxicated thing can not be end. The more use of such type of thing the more satisfaction is found. Initial unit- when the initial unit of a commodity is used in less than appropriate quantity, then the marginal utility from the additional units goes on increasing.

Indifference Curve: 

Indifference Curve An indifference curve may be defined as the locus of point each representing a different combination of two substitute goods, which yield the same utility or level of satisfaction to the consumer. Therefore, he is indifferent between any two combination of two goods when it comes making a choice between them. An indifference curve is also called ISO Utility curve and Equal utility curve. A consumer preference among consumption bundle may illustrated with indifference curve (an indifference curve shows bundle of goods that the make consumer equally happy).

PowerPoint Presentation: 

Exp- a consumer consume two goods, X and Y, and he makes five combination a, b, c, d and e of the two substitute commodities. Combination Quantity of Pepsi (Y) Quantity of Pizza (x) Total Utility A B C D E 25 15 8 4 2 3 5 9 17 30 U U U U U

PowerPoint Presentation: 

Commodity X 5 7 10 12 15 20 25 30 Commodity Y 30 25 15 10 0

The Marginal Rate of Substitution (MRS): 

The Marginal Rate of Substitution (MRS) An indifference curve is formed by substituting one good for another. The MRS is the rate at which one commodity can be substituted for another, the level of satisfaction remaining the same.

Properties of Indifference curve: 

Properties of Indifference curve Indifference curve will be downward slopping. Indifference curve can not intersect or touch each other. Indifference curve must be convex to the origin. Upper indifference curve represent a higher level of satisfaction than the lower ones

PowerPoint Presentation: 

Indifference curve will be downward slopping :- We know that along and indifference curve the level of utility always same, this mean that to get the same level of utility if the consumer consume more of one commodity , he has to consume less of the other commodity to maintain the same level of utility. When the consumer increase the consumption of commodity q1, the consumption of the commodity q2 remaining the same, the utility level of the consumer will rise so to maintain the same level of utility consumer has to sacrifice certain quantity of the commodity q2 which will naturalize the additional gain in utility from q1. Q2 A B 0 C D Q1 K k P R U

Explanation :-: 

Explanation :- P is the a Point on the indifference curve U. at this point the consumer consume OC unit of commodity q1 and OA units of the commodity q2. when the consumer moves from the point of P to point R, he consume CD unit more of q1. as the result of this his utility level increases. To neutralize this increase in utility he decrease consumption of q2 by the amount AB unit so as to remain on the same indifference curve

Two indifference curves can not intersect or touch each other:: 

Two indifference curves can not intersect or touch each other: A Q2 Q1 0 U0 U1 C D B M N

Explanation:: 

Explanation: When two indifference curve intersect each other. Suppose that there are two indifference Uo and U1, Where U1 denotes a higher level of utility than the indifference curve Uo. The curve intersect at a point A and C is a point of vertically above the point B. it can be said that CPB (C is more preferable than B), This means that an indifference curve has to lie wholly above or below another indifference curve so that a higher indifference curve represent a higher level of utility

An indifference curve must be convex to the origin:: 

An indifference curve must be convex to the origin: Indifference curve is not only negative sloped, but are also convex to origin. The convexity of the indifference curves implies two properties. that the two commodity are substitutes for each other That the marginal rate of substitution b/w the two goods decreases as a consumer moves along an indifference curve.

Upper indifference curve Represent a Higher level of satisfaction than the lower ones: 

Upper indifference curve Represent a Higher level of satisfaction than the lower ones An indifference curve placed above and to the right of another represent a high level satisfaction than the lower ones. It represent a higher level of satisfaction. The reason is that upper indifference curve contains all along its length a larger quantity of one or both the good than the lower indifference curve. And a larger quantity of a commodity is supposed to yield a greater satisfaction than the smaller quantity of it.

Comparison between Lower and Upper Indifference curve: 

Comparison between Lower and Upper Indifference curve Commodity Of X COMMODITY y 0 x a b c d IC2 IC1

Consumer Equilibrium: 

Consumer Equilibrium consumer attains his equilibrium where he maximizes his total utility, market prices of good or commodity and services what he want consume. The consumer is said to be in Equilibrium when he obtains the maximum possible satisfaction form his purchase, given the income of consumer and prices of good in the market. Under the indifference curve and Budget line approach consumer is in equilibrium at a point where the price is touching the attainable point.

Consumer equilibrium of one goods: 

Consumer equilibrium of one goods Consumer equilibrium 0 x mu1 mu x mu1 Prices of good or commodity 20 10 Quantity of goods or commodity Consumer Equilibrium is Rs. 20= 10 unit

Equilibrium of the consumer of many goods: 

Equilibrium of the consumer of many goods A Q O Q B IC1 IC2 IC3 E j P m K Commodity A 20 Commodity Y Consumer Equilibrium is 20 unit of X good = 20 Unity of Y goods

Consumer Equilibrium with indifference curve: 

Consumer Equilibrium with indifference curve There are three indifference curve IC1, IC2 and IC3. each represent highest satisfaction level of the consumer but the income or budget line show the power of purchasing if the consumer make three different combination to find the maximum satisfaction to given the price of commodity but he can find the maximum satisfaction where the indifference curve tangent to budget or income line that point would show the highest level satisfaction of the consumer that point would be consumer equilibrium point on this point consumer give the price of the commodity and find the highest satisfaction level satifaction of using set of commodity.

Effect of change in income on consumer demand: 

Effect of change in income on consumer demand We examine the effect of change in consumer’s income on his consumption behavior, assuming that prices of all goods and services, and consumer’s taste and preference remain constant. when consumer income change, his capacity to buy goods and services change too, other things remaining the same. These changes are by a parallel upward or downward shift in the consumer’ budget line. When consumer income decrease, his budget line shift downward and when consumer increase, his budget line shift upward to the right. With the changes in his income, the consumer moves from one equilibrium point to another. Such movement show the rise and fall in the consumption market.

PowerPoint Presentation: 

A B C D E J J K L M IC1 IC2 IC3 IC4 IC5 C I N

Assumption of Consumer Equilibrium on the indifference curve: 

Assumption of Consumer Equilibrium on the indifference curve There must be indifference map showing scale of preference for various combination of good and this scale of preference remains the same throughout the analysis. Constant Income Price remain constant of X and Y goods. Every commodity would be uniform and divide equally Consumer is rational and he want to get maximum satisfaction.

Condition of Equilibrium: 

Condition of Equilibrium A consumer find consumer equilibrium when he fullfill certain condition. Consumer is only find the equilibrium point where income line would be tangent on indifference curve. For the equilibrium point, MRS (Marginal rate of substitution) would be diminishing in nature.

Budget Line or the Budget constrain: 

Budget Line or the Budget constrain Every rational consumer seek to maximize his total utility of the commodity bundle he consume. However, he has a given income which sets limit to his maximizing behavior and it is called budget line. When he spends it in purchasing particular proportions of the two commodities whose prices are predetermined, income acts as constraints in the attempt for maximizing utility. Exp- Let Y be the fixed income of the consumer and P1 and P2 be the prices per unit of q1 and q2. then budget equation of the consumer can be written as Y=P1.Q1+P2.Q2

Graph of budget line: 

Graph of budget line Q2 Q1 O A B Y/P2 Y/P1

Income increase: 

Income increase If the income of the consumer increase, the price of the commodity remaining the same, then his budget line shift to the right. Similarly, if the income of the consumer decrease the budget line will shift downward. If the price of one commodity changes the price of the other commodity and the income of the consumer remaining the same, the slope of the budget line change.

Graph of budget line and its constraints: 

Graph of budget line and its constraints Figure . 1- Budget line due to change in income, price remaining the same2- Budget line due to change in price of q1, price of q2 and income remaining the same q2 0 q1 q2 0 q1 C A E F B D A D B C Increase in income Decrease in income Decrease In price of good q1 Increase in price of good q1

The Budget Line : 

The Budget Line Consumption possibility Ice cream (per month) Cola (Per month) A B C D E F 0 1 2 3 4 5 10 8 6 4 2 0

The Budget line: 

The Budget line 10 8 6 Cola Per 4 Month 2 0 1 2 3 4 5 6 7 8 9 10 Ice Cream (per month) unaffordable affordable Budget line If the consumer is having passion to spend Rs. 200 for Cola or Ice Cream. Cola is Rs 10 and Ice Cream is Rs. 5

Consumer Surplus: 

Consumer Surplus The concept of consumer surplus was first introduced by Marshall. The surplus arises because we “receive more than we pay”. It is difference between the amount of money that we are willing to pay and the money we actually pay , consumer enjoy consume surplus if we pay the same amount of money for each and every unit of good bought. The amount that the consumer is willing to pay for the first unit of good he buys is termed as consumer marginal value. The marginal value decrease as more and more units are bought .

Graph of Consumer Surplus: 

Graph of Consumer Surplus R1 r2 p1 p2 p N B O A Q1 Q2 Q q

Consumer Surplus: 

C onsumer Surplus Let a consumer buy 5 bread and the market price of each bread is Rs. 10. Unit of Bread Marginal Utility 1 2 3 4 5 50 40 30 20 10 In this condition, 50+40+30+20+10 = Rs. 150 – 50 =Rs. 100, this will be consumer surplus for the consumer.

PowerPoint Presentation: 

E A B P1 P2 P3 0 Q y x