short question and long question Class 11 KPK Economics Notes Chapter 2 (Consumer behavior) for all boards.
Q.1) Define the terms.
Point of Satiation, Wealth, Utility and Scarcity, Law of substitution, Goods and services, MU, Value, Price, Indifference curve, Budget Line.
Answer: Point of satiation: Satiation in consumer theory in economics is the point of maximum satisfaction or bliss point that can be achieved by a consumer. Wealth: It includes all those things, which are used by the people and are not free. Its a measure of the value of all of the assets of worth owned by a person, community, company or country. Wealth is calculated by taking the total market value of all the physical and intangible assets of the entity and then subtracting all debts. Utility and scarcity: Scarcity: It is said that economics is the science of scarcity and choice. It is true because scarcity lies in the roots of all economic problems. Basically it means that society’s resources are limited and cannot produce all the goods and services they wish to have. Scarcity is a universal fact which forces choice and creates conflict Utility: an economic term referring to the total satisfaction received from consuming a good or service. In another place utility can be described as the power of a good or service to satisfy a human want or utility is the satisfaction that a person gets from consumption of a good or service. Law of substitution: Law of substitution is defined as: if other things do not change and consumer increases the use of a commodity, the same utility of every new unit of the commodity will be less than the utility of the previous unit. It is an economic proposition that no good is absolutely irreplaceable at some set of prices, consumers will substitute other goods for it. Goods and services In economics, goods and services are the outcome of human efforts to meet the wants and needs of people. Economic output is divided into tangible goods and intangible services. Goods are items that can be seen and touched, such as books, pens, salt, shoes, hats whereas services cannot be touched they are seen and felt. Like a telephone call from the mobile network you are using. Human wants Human wants are a desire to have something. Wants are of two types. Economic and non-economic, economic wants are those which require money to be fulfilled unlike non economic such as friendship, or a desire to have a family. Human wants are unlimited and there is no end to them. Marginal utility: utility is the satisfaction or benefit derived by consuming a product; thus the marginal utility of a goods or service is the change in the utility from an increase in the consumption of that good or service. Price: The amount of money that has to be paid to acquire a given product. Insofar as the amount people are prepared to pay for a product represents its value, price is also a measure of value. Indifference Curve: A curve on a graph (the axes of which represent quantities of two commodities) linking those combinations of quantities which the consumer regards as of equal value. Budget Line. Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given income and prices, such that the cost of each of these combinations is equal to the money income of the consumer.
Q.2) Write a note on the nature and characteristics of human wants.
Answer: “Man is a bundle of desires.” His wants are infinite in variety and number. Some of his wants are organic and natural. By Tushar Seth He must have some food to live, some clothing to cover his body and some sort of shelter to protect himself against the in-clemencies of weather, and also against his enemies. Without these things man’s life would be impossible. Following are some characteristics of human wants 1. Wants are unlimited: Human wants are unlimited in number and there is no end to them. When one want is satisfied then another arises. Wants go on multiplying. They are never completely satisfied. 2. Wants vary in nature: Wants may vary with time, place and person. Different persons may want different things. Even the same person may want different things at different times and at different places. 3. Wants differ in intensity: All wants are not equally urgent and intense. Some wants are more urgent and important than others. More urgent wants must be satisfied earlier while other wants can be postponed. 4. Wants are repetitive: Many human wants are recurring in nature. For example, the need for food is felt after every few hours. Even the wants for durable goods like furniture and car, etc., keep on recurring after some period. 5. Wants are progressive: Human wants go on increasing with improvement in the income, education and status of a person and with the progress of civilization. 6. Wants are competitive: A person has several wants at the same time. But the means to satisfy them are limited. Therefore, he has to choose between several wants and arrange them in order of priority. He satisfies urgent wants and postpones many others to be satisfied in future. 7. Wants are also complementary: Several wants must be satisfied together in a group. One want gives rise to another want. For example, if a person wants to write a letter he will require paper, pen and ink. Similarly, a person who buys a car requires petrol to run it. 8. Wants are satiable: An individual want can be completely satisfied at a particular point of time. For instance, when a hungry person takes food, his want is satisfied. But the same want will arise again. Some wants may never be satisfied e.g., miser’s greed for wealth, politician’s lust for power, etc. 9. Wants are subjective: Human wants cannot be measured in absolute terms. They are subjective and relative. They vary from person to person, place to place and time to time. Wants are influenced by advertisements, publicity, etc. 10. Wants change into habits: When a particular want is satisfied continuously, a person may get used to it and it may grow into a habit. For example regular drinking of tea, coffee, alcohol, etc. becomes a habit for many people. 11. Wants arise from multiple sources: Some wants such as food, water, clothing, etc. arise due to natural instincts. Everybody needs them. But other wants arise from economic and social status, social obligation, etc. For example, a person may have to eat, dress and live like others in the society. Similarly, the same want may be satisfied its several ways depending on the relative prices and money available with a person. 12. Wants create economic activity: Human wants give rise to economic activities. Unlimited and ever increasing human wants accelerate the pace of industry, commerce and trade. 13. Wants are alternative: There are alternative ways of satisfying a particular want. For example, a person who wants to travel from one place to another may hire an auto-rickshaw or a taxi or may board a bus or train. The final choice depends upon their relative prices, the money available and the time available. 14. Wants depend on several factors: Several factors determine the wants of a person. Nature of the person, his education and income, social customs, economic development of the country, advertisements and publicity are some of the main factors which influence human wants.
Q.3) What is utility describe its characteristics ?
Answer: Utility: It is an economic term referring to the power of a good or service to satisfy a human want or it can be defined as the satisfaction that a person gets from consumption of a good or service. On another place utility is the power of a good or service to satisfy a human want or utility is the satisfaction that a person gets from consumption of a good or service. Characteristics 1. Subjective Concept: Utility is a subjective concept as it differs from person to person depending on their tastes, preferences, etc. e.g. A newspaper may have utility for a literate person but has minimum utility for an illiterate. 2. Relative Concept: Utility is a relative concept as it may differ from time to time and place to place. A commodity may have utility at a particular time or place and may not have utility at another point of time or place. For e.g. Mobile phones have utility at homes, but have limited utility inside a classroom. 3. Morally Colorless Concept: Utility is a morally colorless concept. It means that it has no ethical consideration. It does not consider whether the commodity is ethical or unethical. For e.g. Drugs give utility to a drug addict even though drugs are immoral and unethical. 4. Different from Pleasure: Utility is different from pleasure. A commodity which has utility may or may not give pleasure. For e.g. Medicines have utility for the patient even though he may not enjoy taking the medicines. 5. Different from Usefulness: Utility is different from usefulness in the sense that a commodity having utility may even be harmful or useless. e.g. Cigarettes give utility to a smoker but are harmful to his health. 6. Different from Satisfaction: Utility is the mean while satisfaction is the end of a commodity. A commodity has utility before it is consumed while it gives satisfaction after consumption. e.g. Food has utility before it is consumed while it gives satisfaction after consumption. 7. No Cardinal Measurement: Utility cannot be measured in numerical terms, i.e. cardinally. It can however be measured in ordinal terms, i.e. 1st, 2nd, 3rd, etc. However, economists like Dr. Alfred Marshall expressed utility in cardinal terms to explain the law of Diminshng marginal utility. 8. Abstract Concept: Utility is abstract in the sense that it is intangible in nature and has no physical existence. One can only feel it but cannot touch or see it. But the commodities that have utility can, however, be touched and seen. 9. Multi-Purpose: If a commodity is capable of satisfying several wants, it is said to have multi-purpose utility. For e.g. Electricity supplied at our houses can be used for various purposes such as charging mobiles, use of televisions, using fans, etc. thus having multi-purpose utility. 10. Depends on intensity of want: Utility of a commodity is directly proportional to the intensity/urgency of the want. The more intense or urgent the want, the more utility the commodity has. For e.g. Disaster management teams have more utility at the time of disasters, and have less utility during normal times.Disapproval History :(December 18, 2015) 1.. Please use only “e.g” or the whole “For Example” and dont use “for e.g”. For e.g. Food has utility before it is consumed…………… For e.g. Medicines have utility for the patient even though he may not enjoy taking the medicines.
Q.4) Differentiate between the following:
i) Consumer goods and capital goods ii) Utility iii) Economic and non-economic goods
Answer: Consumer goods and capital goods Capital goods are the goods which are used to produce consumer goods.Consumer goods are purchased by consumer for their own sake.They satisfy consumer wants directly For example: machinery. In simple words we can also say that capital goods are the goods which make other goods Consumer goods are not used to produce other goods. Consumer goods are used or consumed by the consumer and they do not aid in further production.they are purchased by pruducers for further production of goods and services.They do not satisfy producers wants directly but are used to earn profit for them For example: Burger. Economic and noneconomic goods Economic goods are those which require money to obtain them For Example cloths, food etc. noneconomic goods are the one which don’t require any money to obtain them for example air to breath, friendship, etc. Utility An economic term referring to the total satisfaction received from consuming a good or service. On another place utility is defined as the power of a good or service to satisfy a human want or utility is the satisfaction that a person gets from consumption of a good or service. Value and price (extra) The word value is used in two meanings: Value in use: it indicates the commodity, the more valuable good is the one which has more utility. Value in exchange: in economics value means value in exchange, value of a commodity is the amount of other goods and services, which is obtained in exchange for it. Basically value is a relative term and it varies with person, place, and time. Whereas value of a commodity expressed in terms of money is called its price.
Q.5) Explain the terms ‘Utility’, ‘Marginal utility’ and ‘Total utility’. Show how is it that TU « maximum when MU is zero. Make table and diagram.
Answer: Utility An economic term referring to the total satisfaction received from consuming a good or service. On another place utility is defined as the power of a good or service to satisfy a human want or utility is the satisfaction that a person gets from consumption of a good or service. Now for further study in order to measure the utility terms marginal and total utility came in view. Here is a brief difference and explanation of it. Total Utility and Marginal Utility Every commodity possesses utility for the consumer. When the consumer buys apples he receives them in units, 1, 2, 3, 4 etc., as shown in Table 1. To begin with, 2 apples have more utility than 1, 3 apples have more utility than 2, and 4 apples have more utility than 3. The units of apples which the consumer chooses are in a descending order of their utilities. In his estimation, the first apple is the best out of the lot available to him and thus gives him the highest satisfaction, measured as 20 utils. The second apple will naturally be the second best with lesser amount of utility than the first, and has 15 utils. The third apple has 10 utils and the fourth 5 utils. Total utility is the sum total of utilities obtained by the consumer from different units of a commodity. In our illustration, the total utility of two apples is 35= (20+ 15) utils, of three apples 45= (20+15+10) utils, and of four apples 50= (20+l 5+10+5) utils. Marginal utility is the addition made to total utility by having an additional unit of the commodity. The total utility of the two apples is 35 utils. When the consumer consumes the third apple, the total utility becomes 45 utils. Thus, marginal utility of the third apple is 10 utils (45-35). In other words, marginal utility of a commodity is the loss in utility if one unit less is consumed. Algebraically, the marginal utility (MU) of n units of a commodity is the total utility (TU) of n units minus the total utility of n-1. Thus MU of nth unit=TU of n unit—TU- of (n-1). MUn = TUn – TUn-1 The relation between total and marginal utility is explained with the help of Table 1. Table 1: Relation between TU and MU:
So long as total utility is increasing, marginal utility is decreasing up to the 4th unit. When total utility is maximum at the 5th unit, marginal utility is zero. It is the point of satiety for the consumer. When total utility is decreasing, marginal utility is negative. This relationship is shown in Figure 1. To draw the curves of total utility and marginal utility, we take total utility from column (2) of Table 1 and obtain rectangles. By connecting the tops of these rectangles with a smooth line, we get the TU curve that peaks at point Q and then slowly declines. To draw the MU curve, we take marginal utility from column (3) of the table. The MU curve is represented by the increment in total utility shown as the shaded blocks in the figure.
When the tops of these blocks are joined by a smooth line, we obtain the MU curve. So long as the TU curve is rising, the MU curve is falling. When the former reaches the highest point Q, that latter touches the X-axis at point С where the MU is zero. When the TU curve starts falling from Q onwards, the MU becomes negative from С onwards. Hence proved that at the point Q, TU is maximum and at the same time at point C the MU is ZERO.
Q.6) Explain Law of Diminishing Marginal utility. Discuss its assumption and exceptions.
Answer: LAW OF DIMINISHING MARGINAL UTILITY Law of diminishing marginal utility is a fundamental law of economics. Many economic theories are based on it. Marginal utility represents the increase in total utility when one more unit is consumed. It is our common experience that when a person has strong desire for a good, its use gives him a lot of satisfaction. In economics, we say that the good has great utility for him. But as the quantity consumed of the good is increased, it becomes less attractive. Every new unit of it has less utility. This universal fact about utility is known as law of diminishing marginal utility. We can define: “If other things do not change and a consumer increases the use of a commodity, the utility of every new unit of the commodity will be less than the utility of the previous unit”. OR “Other things being equal, a successive increase in the stock of a commodity with a consumer diminishes (decreases) its marginal utility”. Other things being equal means that the quality of the commodity and taste of the consumer do not change. Law of diminishing marginal utility can be explained with the help of a simple example. Utility is not directly measurable but for the purpose of illustration we assume that we can measure it. (Sometimes economists use imaginary units called ‘utils’ for this purpose. Suppose a person starts eating apples. He gets utility as follow
Number of apples
Marginal Utility MU
Total utility TU
We see that the first apple gives the consumer 10 units of utility. When he gets two apples, total utility goes to 18. Thus, second apple has increased total utility by 8(18 – 10 = 8). This is marginal utility. Similarly, when the consumer eats third apple, marginal utility is 6. As the consumer goes on eating more and more apples marginal utility goes on decreasing (and TU grows at a slower and slower rate). It may fall to zero or even become negative. In the above table, 7th apple has negative utility i.e. dis-utility (e.g. upsetting of stomach). The consumer would not like to eat 7th apple even if free. Law of diminishing marginal utility can also be explained in a graphical form.
Apples are measured along x-axis and marginal utility along y-axis. First apple gives 10 utility. This is shown by the line aa’. Similarly, utility of other apples is shown by line bb’, cc\ dd’, ee, f and gg . Utility of each new apple decreases so the lines get shorter and shorter. When we Join the end points of lines, we get marginal utility curve. It is downward sloping. Assumptions The law of diminishing marginal utility is true only with the following assumption* 1. Nature of the commodity should not change otherwise the law will not apply. Example: Suppose a person purchases a second pen which is quite superior to the first because the quality of two pens is not same, utility of the second pen may not be less than the first. 2. Suitable unit If the units of consumption are not of normal size, the law may not Prove true. Example: If a thirsty person starts drinking water by spoons, the marginal utility may at first increase, instead of decreasing. 3. Continuous Consumption e.g. a person drinks one glass of water in the morning and another at noon. Because of long interval between drinking of two glasses of water, the utility of second may not be less than the first. 4. Taste and Attitude of the consumer remains the same: If a person eats one mango and has no desire for more. Meanwhile a doctor tells him that mangoes are useful for his health. This may change his attitude and he may get more utility from second mango than from the first. 5. Income of the consumer does not change otherwise this law will fail. Examples: A person purchases one electric fan. He thinks that a second one has less utility. Meanwhile he comes to know that he has won a big prize on a prize-bond. Second fan may now appear to him quite attractive. Its utility may not be less than the first’s. Limitations Sometimes, it appears that the law of diminishing utility does not apply to the following conditions. However, if we deeply think we find that such doubt arises because the assumptions and conditions of the law are ignored. Otherwise the law is universally applicable. (i) Knowledge If a person acquires more and more knowledge, his appetite for knowledge increases. Utility of further study rises.However if a person reads the same book again and again with no interval, marginal utility will certainly fall. (ii) Wealth and Money Some people argue that since money can be used to purchase every good, marginal utility of money does not fall. Similarly, to a miser each addition in his wealth gives more utility. Actually, money and wealth are no exception. If Income of a person increases and he becomes rich, he is ready to spend more money on a commodity, which he previously thought not worthwhile. (iii) Drugs and Narcotics If a person is addicted to smoking, drinking or drugs, the more he uses these, the greater urge he feels. But we should remember that if he goes on using the commodity without any break, his desire for more will diminish. (iv) Rare articles (and antiques) someone feel that the people who are collecting rare articles of historical importance, get increasing satisfaction with every addition to their collection. But it is not true. Suppose a person has two coins of Emperor Akbar’s period in his possession. Now if he gets a third of the same type, he will not be as much pleased as he felt on finding the first coin. (v) Articles of Fashion If some articles are purchased just out of fashion or to show One’s wealth the marginal utility may increase instead of decreasing. But in this case too, the law applies provided we consider only one commodity. A person certainly loses interest in a commodity if he gets more and more of it. Practical Importance This is a basic law of economics with great practical importance. 1. It explains why demand curve falls from left to right when people get more quantity of a commodity, its marginal utility falls. It does not appear to them as attractive as before. Thus, they purchase additional quantity only when price is lowered 2. It provides basis for progressive taxation. Progressive tax means that rate of a tax is higher for higher incomes. When income of a person increases MU of money falls. If the person with high income has to pay tax at the same rate as a poor person, he feel less burden. Therefore to do justice, rate of tax should be higher for the rich people. 3. It indicates the need for redistribution of wealth. The socialists advocate equal distribution of wealth on the ground that marginal utility of money for the rich is lower than for the poor. They say that if some wealth is taken away from the rich and distributed among the poor, total utility of the community increases. 4. It explains how a consumer gets maximum utility. In order to get maximum possible utility out of his income, a consumer should spend the amount in such a way that per rupee marginal utility of all commodities purchased becomes equal. Total utility is maximum when the following equation holds.
Where MUA is marginal utility of commodity A. And P shows its price.
Q.7) Explain law of EQUI-MARGINAL utility. Point out it practical significance and its limitations
Answer: LAW OF EQUI MARGINAL UTILITY A very important fact of human life is scarcity of resources and insufficient incomes. We cannot find a single person who feels that his income is enough to satisfy all of his wants. Thus, it is natural that people want to avoid wastage and try to spend their incomes in such a way that they get maximum total utility. For this purpose they have to compare the utilities of various commodities and use them according to the principle of Equi-Marginal. This principle or law can be defined as: “Total utility from a given amount is maximum when it is spent on various goods in such a way that marginal utility of money spent on each good becomes equal’’ OR Total utility of a given amount of money is maximum when it is spent on the principle of MUa /Pa = MUb /Pb = ……………….. MUn /Pn Where MU represents the marginal utility of commodity A and Pa is the price of A. In order to achieve maximum possible utility, the consumer tries to balance th utilities at the margin. If he feels that by withdrawing a rupee from one good and spending on some other he can increase total utility, he will certainly do so. Since he substitutes goods of greater Utility for goods of lesser utility, the law of equi- marginal utility is also called law of substitution. When a consumer succeeds in getting maximum utility, he s fully satisfied and has no desire to make any change in his purchase plan. So it is called consumer’s s-quilibrium. Take an example of a student who is preparing five subjects for his examination. He has distributed his time among these subjects. Now if he feels that by taking away one hour daily from English and spending it on Economics, he has the chance to lose 5 marks in English and add 20 marks in Economics, he will change the time distribution. On the other hand if he feels that by such change in time he will lose 10 marks in English and gain equal marks in Economics, he will not do it. In this situation he is in equilibrium Explanation For its explanation, we make the following assumptions:
The consumer has a fixed amount to spend, say, 7 rupees.
He can purchase only two goods (say, apples and bananas).
The marginal utilities of the two goods are as given in the following table.
Price of apple and banana is Re. 1 per unit.
Equilibrium: It represents a situation where there is no tendency to change.
MU of A
MU of B
From the table we see that initially the consumer should spend on commodity A because its marginal utility is greater. When he has spent three rupees on A he finds that it is now better to spend on B. In this way by comparing the marginal utilities of the two commodities, he goes on spending the amount. When he has spent four rupees on A and three rupees on B the marginal utilities become equal and total utility is 142 which is maximum possible. If the consumer spends the income in any other way, then on the marginal utilities become unequal and on the other total utility is less than 142. For example, if he purchases the combination of 3 apples and 4 bananas, the marginal utilities are not equal and total utility is only 140, thus, we see that total utility of the amount spent is maximum only when marginal utilities of both goods purchased are equal. Graphic Method The principle of EQUI-MARGINAL utility can also be explained in a diagram:
In figures 2.4 (a) AA’ represents marginal utility curve of apples while in figure 2.4. (b) BB’ is the marginal utility curve of bananas. When the consumer spends ON rupees on A and OM rupees on B the marginal utilities from the two commodities are equal i.e. SN = MT. Total utility is equal to area OFASN + area OHBTM. If the consumer spends the amount in some other way, two results will follow: (a) Marginal utilities become unequal (b) Total utility decreases. Suppose the consumer takes away one unit of money (QN) from commodity A to commodity B. This increases MU of A to PQ and decreases MU of B to DE. The marginal utilities are now unequal i.e., PQ is not equal to DE. By this transfer of money the decrease in total utility from A is area SNQP. While increase from B is area MTDE. Since the decreases in total utility is more than the increase. We reach the conclusion that total utility will be maximum only when marginal utilities of two goods purchased are equal. We have seen that maximum satisfaction is obtained only when marginal utility of last rupee spent on one good is the same as marginal utility of the last rupee spent on the other. In general when the consumer is faced with many goods, he will make the best choice if follows the rule.. MU1/P1 = MU2/P2 = MU of last rupee spent on any product. Limitations Following limitations make it difficult to apply it in practical problems.
Incomes of the consumers, prices of goods and tastes are always changing. But Human beings are not calculating machines to constantly make calculations.
Indivisible goods: Many goods are not divisible into smaller units. It becomes impossible to substitute a little of one commodity for another. For example, a car cannot be purchased in parts.
Custom and fashion: Sometimes people purchase goods just out of fashion or custom. They do not care to.equalise marginal utilities.
Time Problem Many Goods last long. It is difficult to compare their utilities; e.g. it is difficult to compare utility of a table lamp with that of chicken roast.
Utility is not measurable: This principle has very weak basis. Utility is not measurable. So it is difficult to compare utilities to find maximum utility. It is not possible to add or subtract utilities.
Practical Importance Law of equi-marginal utility has wide practical importance.
Consumer behavior: In spite of limitations, every consumer, consciously or unconsciously tries to act according to this principle and spend his income in such a way that total satisfaction is maximum. He compares utilities and buys those commodities first which have more satisfaction.
Producer policy: Every producer tries to use the most economical combination of Factors. He achieves this goal when he makes the marginal productivity of factors equal
Rewards of factors of production, i.e. rent of land, interest of capital, wages of labor, all are determined according to their marginal productivity, if the marginal product of a factor is relatively higher than that of another, the entrepreneur substitutes it for the other. The producer tries to equalize marginal productivity of all factor inputs.
Exchange of goods is also done according to this principle. People exchange a commodity whose utility is low for a commodity with higher utility. Exchange of goods stops when marginal utilities become equal.
Q.8) Explain the principle on the basis of which a consumer spends his income.
Answer: Formula for Consumer’s Equilibrium To achieve the aim of maximization of total utility from our resources, we compare the utilities of commodities, which we want to buy. In this effort, we face two problems. Firstly, we need per rupee utilities. Direct comparison of utilities, in most cases, is not possible. Commodities have different units of measurement and different prices. For example, milk is available in liters and sugar in kilograms. How to compare their utilities? To make utilities comparable, we find their per rupee utilities. Suppose utility of 1 kg of sugar is 100 units and its price is Rs.20 per kg. Utility of 1 liter of milk is 60 and price is Rs. 10 per liter. Per rupee utility from sugar will be (utility/price) = 100/20 = 5 units. Per rupee utility of milk is 60/10 = 6. Per rupee MU of milk is greater, so we should spend the amount to buy milk. Secondly, MU of commodities goes on falling. In our example the utility of the first liter of milk is higher. But as we buy next liters, MU falls according to law of diminishing MU. When we have bought some milk, we may find that it’s per rupee MU has become lower than per rupee MU of sugar. In order to get maximum total utility of our money, we must now spend on sugar. From the above discussion we conclude that while spending money on various items, we must keep an eye on there per rupee MUs i.e. (MU/Price) and act as follows: A). If MU of sugar > MU of milk i.e. ( MUS < MUM )
Price of sugar Price of Milk PS PM
B). If MU of sugar < MU of milk i.e. ( MUS < MUM )
Price of sugar Price of Milk PS PM
c). If MU of sugar < MU of milk i.e. ( MUS < MUM )
Price of sugar Price of Milk PS PM
Now we need to divert money from sugar to milk, nor from milk to sugar. We are in equilibrium and are getting maximum possible utility. We can generalize the above conclusion by including more than two commodities in the Utility-maximizing Rule as
MUa = MUb = ……………….. MUn
Pa Pb pn
Where MUA= Marginal utility of commodity A and PA = Price of A. Example: We can explain the principle of utility maximizing rule in a table. Suppose Total amount for spending = Rs. 100 Price of sugar (Ps) = Rs. 20 Price of milk (PM) = Rs. 10
Marginal utilities of the commodities are given in second and third columns. If the consumer spends Rs. 60 on sugar to get 3 k.g. and Rs.40 on milk to get 4 liters per rupee marginal utilities are equal i.e. MUs /Ps = 60 /20 = 3 MUm/Pm = 30/10 = 3 From 3 units of sugar TUS = 100+80+60 = 240 From units of milk TUM = 60+50+40+30 = 180 Total utility = 420 To prove our point we try another combination. Spend Rs. 80 to get 4 k.g. of sugar. So its MUS/Ps=2. And when we spend the remaining Rs. 20 on milk to get 2 liters of it. MUM/PM = 5. It means, MUS /PS < MUM /PM In new situation, TUS =100 + 80 + 60 + 40 = 280 TUM = 60 + 50 = 110 Total utility =390 So, we find that our new combination, in which per rupee marginal utilities are not less than total utility. We can try many other combinations but total utility will always be less than 420 because per rupee marginal utilities will not be equal. Hence the result: total utility of an amount is maximum when
MUa = MUb = ……………….. MUn
Pa Pb pn
Rational people think in terms of margin and arrive at best decisions
Q.13) What is utility describe its characteristics ?
Answer: Utility: It is an economic term referring to the power of a good or service to satisfy a human want or it can be defined as the satisfaction that a person gets from consumption of a good or service. On another place utility is the power of a good or service to satisfy a human want or utility is the satisfaction that a person gets from consumption of a good or service. Characteristics 1. Subjective Concept: Utility is a subjective concept as it differs from person to person depending on their tastes, preferences, etc. e.g. A newspaper may have utility for a literate person but has minimum utility for an illiterate. 2. Relative Concept: Utility is a relative concept as it may differ from time to time and place to place. A commodity may have utility at a particular time or place and may not have utility at another point of time or place. For e.g. Mobile phones have utility at homes, but have limited utility inside a classroom. 3. Morally Colorless Concept: Utility is a morally colorless concept. It means that it has no ethical consideration. It does not consider whether the commodity is ethical or unethical. For e.g. Drugs give utility to a drug addict even though drugs are immoral and unethical. 4. Different from Pleasure: Utility is different from pleasure. A commodity which has utility may or may not give pleasure. For e.g. Medicines have utility for the patient even though he may not enjoy taking the medicines. 5. Different from Usefulness: Utility is different from usefulness in the sense that a commodity having utility may even be harmful or useless. e.g. Cigarettes give utility to a smoker but are harmful to his health. 6. Different from Satisfaction: Utility is the mean while satisfaction is the end of a commodity. A commodity has utility before it is consumed while it gives satisfaction after consumption. e.g. Food has utility before it is consumed while it gives satisfaction after consumption. 7. No Cardinal Measurement: Utility cannot be measured in numerical terms, i.e. cardinally. It can however be measured in ordinal terms, i.e. 1st, 2nd, 3rd, etc. However, economists like Dr. Alfred Marshall expressed utility in cardinal terms to explain the law of Diminshng marginal utility. 8. Abstract Concept: Utility is abstract in the sense that it is intangible in nature and has no physical existence. One can only feel it but cannot touch or see it. But the commodities that have utility can, however, be touched and seen. 9. Multi-Purpose: If a commodity is capable of satisfying several wants, it is said to have multi-purpose utility. For e.g. Electricity supplied at our houses can be used for various purposes such as charging mobiles, use of televisions, using fans, etc. thus having multi-purpose utility. 10. Depends on intensity of want: Utility of a commodity is directly proportional to the intensity/urgency of the want. The more intense or urgent the want, the more utility the commodity has. For e.g. Disaster management teams have more utility at the time of disasters, and have less utility during normal times.