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                                                     UTILITY

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                                                     UTILITY

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What Is Utility?                                                                                           Utility is a term in economics that refers to the total satisfaction  received from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility.                                                                                                                                                                        

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What Is Utility?                                                                                           Utility is a term in economics that refers to the total satisfaction  received from consuming a good or service. Economic theories based on rational choice usually assume that consumers will strive to maximize their utility.                                                                                                                                                                        

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                                         TYPES OF UTILITY                                                                       

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                                         TYPES OF UTILITY                                                                       

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TOTAL UTILITY:                                                             MARGINAL UTILITY:
> Total utility is the total                                                >  Marginal utility is the
satisfaction received from                                           satisfaction gained from
consuming a given total                                               consuming an additional
quantity of a good or service.                                      quantity of goods.
> Total Utility rises as more                                           >  Marginal utility diminishes
consumption are done.                                                 with an increase in total utility
ex:                                                                                     ex:
a cookie provides a level of                                        when you put your money         utility as determined by its                                           into a machine to purchase a     singular consumption, while a                                     newspaper,the door opens,and   bag of cookies may provide                                        you could presumably take          total utility over the course of                                      more than one newspaper           time it takes to completely                                         for some reason you receive       consume all the cookies in the bag.                          two of the same magazine in                                                                                              the mail instead of usual one.

Total utility formula: TU = U1 + MU2 + MU3
Marginal Utility = Change in total utility/Change in number of units consumed.

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Relationship between total utility and marginal utility

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Relationship between total utility and marginal utility

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MU1=TU1-TU2

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                                  MEASUREMENT OF UTILITY

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                                  MEASUREMENT OF UTILITY

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CARDINAL UTILITY                                                                  ORDINAL UTILITY

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Cardinal utility is the utility where the satisfaction derived by the consumers from the consumption of good or service can be measured numerically.
For example, if a Nissan car gives 5,000 units of utility, a BMW car would give 8,000 units.

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The cardinal utility approach used in analyzing the consumer behavior depends on the following assumptions:                                     1.Rationality: It is assumed that the consumers are rational, and they satisfy their wants in the order of their preference.                                               2.Limited Resources (Money): The consumer has limited money to spend on the purchase of goods and services and thus this makes the consumer buy those commodities first which is a necessity.    3.Maximize Satisfaction: Every consumer aims at maximizing his/her satisfaction for the amount of money he/she spends on the goods and services.                                                                                                                                   4.Diminishing Marginal Utility: This means, with the increased consumption of a commodity, the utility derived from each successive unit goes on diminishing.                                                                      5.Marginal Utility of Money is Constant: It is assumed that the marginal utility of money remains constant irrespective of the level of a consumer’s income.                                                                                                                     

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The cardinal utility approach used in analyzing the consumer behavior depends on the following assumptions:                                     1.Rationality: It is assumed that the consumers are rational, and they satisfy their wants in the order of their preference.                                               2.Limited Resources (Money): The consumer has limited money to spend on the purchase of goods and services and thus this makes the consumer buy those commodities first which is a necessity.    3.Maximize Satisfaction: Every consumer aims at maximizing his/her satisfaction for the amount of money he/she spends on the goods and services.                                                                                                                                   4.Diminishing Marginal Utility: This means, with the increased consumption of a commodity, the utility derived from each successive unit goes on diminishing.                                                                      5.Marginal Utility of Money is Constant: It is assumed that the marginal utility of money remains constant irrespective of the level of a consumer’s income.                                                                                                                     

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The Ordinal Utility approach is based on the fact that the utility of a commodity cannot be measured in absolute quantity, but however, it will be possible for a consumer to tell subjectively whether the commodity derives more or less or equal satisfaction when compared to another.
For example: Suppose a person prefers tea to coffee and coffee to milk. Hence, he or she can tell subjectively, his/her preferences.

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Assumptions of Ordinal Utility Approach                                    1.Rationality: It is assumed that the consumer is rational who aims at maximizing his level of satisfaction for given income and prices of goods and services, which he wish to consume. He is expected to take decisions consistent with this objective.                                           2.Ordinal Utility: The indifference curve assumes that the utility can only be expressed ordinally. This means the consumer can only tell his order of preference for the given goods and services.                             3.Non satiety: It is assumed that the consumer has not reached the saturation point of any commodity and hence, he prefers larger quantities of all commodities.                 

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Assumptions of Ordinal Utility Approach                                    1.Rationality: It is assumed that the consumer is rational who aims at maximizing his level of satisfaction for given income and prices of goods and services, which he wish to consume. He is expected to take decisions consistent with this objective.                                           2.Ordinal Utility: The indifference curve assumes that the utility can only be expressed ordinally. This means the consumer can only tell his order of preference for the given goods and services.                             3.Non satiety: It is assumed that the consumer has not reached the saturation point of any commodity and hence, he prefers larger quantities of all commodities.                 

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                                              THANK YOU

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                                              THANK YOU

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BY
POOJA SREE.B.S
DHARSHINI PRIYA.J.V