Utility and cardinal utility analysis
- 1. SEMINAR Presentation Utility and Cardinal Utility analysis BA Economics Programme Faris K.V. Muhammed Noufal Muhammed Jaseel Jamsheed P.T. SAFI Institute of Advanced Study, Vazhayoor
- 2. Contents I. Introduction to Utility Analysis a) Meaning of Utility b) Cardinal Utility analysis and Ordinal Utility Analysis c) Total Utility and Marginal Utility II. Cardinal Utility a) Assumptions of Cardinal Utility analysis b) Law of Diminishing Marginal Utility c) Law of Equal-Marginal Utility III. Critical evaluation of Cardinal Utility analysis IV. Conclusion
- 3. 1. Introduction to Utility Analysis a) Meaning of Utility b) Cardinal Utility analysis and Ordinal Utility Analysis c) Total Utility and Marginal Utility
- 5. I. Introduction to Utility Analysis Meaning of Utility Utility means - The power of a commodity that satisfy the wants of consumer - want satisfying power Introduced by Jermy Bentham Measurement ‘Utils’ Subjective entity
- 6. Cardinal Utility analysis and Ordinal Utility Analysis
- 7. Cardinal Utility analysis and Ordinal Utility Analysis Utility Analysis Cardinal Utility analysis Ordinal Utility Analysis • Alfred Marshal • J. R. Hicks & R.G.D. Allen • can be measured •Cannot be measured but compared • ‘Utils’ as rank • Law of Diminishing Marginal • Indifference Curve analysis Utility • Quantitative . Subjective entity or Personal •Law of Equi-marginal Utility •Mashellian Analysis
- 8. Total Utility(TU) and Marginal Utility(MU)
- 9. Total Utility(TU) and Marginal Utility(MU) Unit of Total Marginal •Total Utility is the sum utility derived from Mango Utility Utility the consumption of bundle of commodity 1 10 2 20 3 29 •Marginal Utility is the rate of change of TU 4 37 from one more unit of extra consumption 5 43 6 48 7 51 8 52 MUn = TUn – TUn-1 9 52 10 50 MU =∆TU/∆Q
- 10. Total Utility(TU) and Marginal Utility(MU) Unit of Total Marginal •Total Utility is the sum utility derived Mango Utility Utility from the consumption of bundle of 1 10 10 commodity 2 20 10 3 29 9 4 37 8 •Marginal Utility is the rate of change 5 43 6 6 48 5 of TU from one more unit of extra 7 51 3 consumption 8 52 1 9 52 0 MUn = TUn – TUn-1 10 50 -2 MU =∆TU/∆Q
- 11. I. Introduction to Utility Analysis a) Meaning of Utility b) Cardinal Utility analysis and Ordinal Utility Analysis c) Total Utility and Marginal Utility II. Cardinal Utility a) Assumptions of Cardinal Utility analysis b) Law of Diminishing Marginal Utility c) Law of Equal-Marginal Utility III. Critical evaluation of Cardinal Utility analysis IV. Conclusion
- 12. 2. Cardinal Utility Analysis a) Assumptions of Cardinal Utility analysis b) Law of Diminishing Marginal Utility c) Law of Equal-Marginal Utility
- 13. Assumptions of Cardinal Utility analysis
- 14. Assumptions of Cardinal Utility analysis 1. Rationality of consumer 2. Cardinal measurability of utility 3. Marginal Utility of Money is constant 4. Diminishing Marginal Utility 5. Utility is Additive – TU= Ux+ Uy+ Uz+…….+ Un 6. The hypothesis of Independent Utility 7. Introspective method
- 15. Law of Diminishing Marginal Utility Gossen First law
- 16. Law of Diminishing Marginal Utility • Gossen first law •According to Alfred Marshall ‘the additional utility which a person derive from the consumption a commodity diminishes, that is Total Utility increase at an diminishing rate ‘
- 17. Law of Diminishing Marginal Utility ‘the additional utility which a person derive from the consumption a commodity diminishes, that is Total Utility increase at an diminishing rate ‘ Unit of Total Marginal Mango Utility Utility 1 10 2 20 MUn = TUn – TUn-1 3 29 4 37 MU =∆TU/∆Q 5 43 6 48 7 51 8 52 9 52 10 50
- 18. Law of Diminishing Marginal Utility ‘the additional utility which a person derive from the consumption a commodity diminishes, that is Total Utility increase at an diminishing rate ‘ Unit of Total Marginal Mango Utility Utility 1 10 10 2 20 10 3 29 9 4 37 8 5 43 6 6 48 5 7 51 3 8 52 1 9 52 0 10 50 -2
- 19. Law of Diminishing Marginal Utility ‘the additional utility which a person derive from the consumption a commodity diminishes, that is Total Utility increase at an diminishing rate ‘ Unit of Total Marginal Mango Utility Utility TU 1 10 10 TU 2 20 10 3 29 9 4 37 8 No of mango 5 43 6 6 48 5 7 51 3 MU 8 52 1 9 52 0 10 50 -2 No of mango MU
- 20. Law of Diminishing Marginal Utility Saturation Point MU =0 or TU is maximum TU TU No of mango MU No of mango MU
- 21. Application of Law of Diminishing Marginal Utility
- 22. Application of Law of Diminishing Marginal Utility 1. Bases of law of demand- why demand curve slops downward 2. Law of equi- marginal utility is derived 3. Consumer surplus derived 4. Progressive Tax can be justified 5. Water-diamond paradox resolve
- 23. Law of Equal-Marginal Utility Consumer’s Equilibrium under Marshellian analysis (Goosen’s Second Law)
- 24. Law of Equal-Marginal Utility Consumer’s Equilibrium under Marshellian analysis •Gossen Second Law •Explain how consumer is maximize his satisfaction by allocating his income with different commodity at various prices. • Condition for consumer equilibrium two commodity MUx/ = MUy/ = MU m Px Py • Condition for consumer equilibrium more commodity MUx/ = MUy/ = ……………………. MUn/P n = MU m Px Py
- 25. Law of Equal-Marginal Utility Consumer’s Equilibrium under Marshellian analysis Condition for consumer equilibrium MUx/ = MUy/ =MUm Px Py Apple (A) MUA MU/PA Banana (B) MUB MU/PB 1 60 20 1 60 12 2 48 16 2 55 11 3 42 14 3 50 10 Apple – 5 Rate 15 Rupees 4 36 12 4 45 9 Banana – 3 Rate 15 Rupees 5 30 10 5 40 8 6 24 8 6 35 7 7 18 6 7 20 4 Price of A = 3 Price of B =5 MU of Money = 10 Expenditure = 5x Price of A + 3 X Price B = 5 x 3 + 3 X 5 = Rs.30
- 26. Law of Equal-Marginal Utility Consumer’s Equilibrium under Marshellian analysis •Gossen Second Law •Explain how consumer is maximize his satisfaction by allocating his income with different commodity at various prices. Marginal Utility MU Apple MU Banana 9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9 Unit of A Unit of B
- 27. Critical evaluation of Cardinal Utility analysis
- 28. Critical evaluation of Cardinal Utility analysis • Utility is not Cardinally measurable • Marginal Utility of money is not constant • Inadequacy of methods of introspection • Utilities are n interdependence • Failure to explain Giffen Paradox • Failure to distinguish income effect and substitution effect
- 29. Conclusion
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