UTILITY ANALYSIS OF DEMAND

Marginal utility
The additional satisfaction or benefit (utility)

that a consumer derives from buying an additional unit of a commodity or service.

The concept implies that the utility or benefit to

a consumer of an additional unit of a product is inversely related to the number of units of that product he already owns.
Marginal utility=

Change in total utilty Change in quantity consumed

Marginal utility and price

The consumer stops where the price and

marginal utility are equal.

All units of commodity being

interchangeable , what is paid for the marginal unit is paid for every unit.
Therefore , we can say that marginal utility

determines price.

Marginal utility and supply

Marginal utility is a function of supply, i.e., it

varies with supply .

In the case of a free good, where the supply

is unlimited , the marginal utility is zero.

Only in the case of scare goods is the

marginal utility is positive .

It increases as the supply contracts and

decreases as the supply increases.

Basic assumptions of Marginal Utility Analysis

Cardinal measurement of utility:- It is assumed that utility can be measured and can be given definite quantity like 1,2 or 3.This means that a person can express the satisfaction derived from consumption of commodity in quantitative term. Utilities are independent:-Marginal utility assumes
that utility of different commodities are independent to each other.

Constant Marginal utility of money:-Another

important assumption is that the marginal utility of money remains constant.

LAW OF DIMINISHING MARGINAL UTILITY

This law can be stated as the fall in marginal utility of any

good due to successive consumption of that good.

For ex:- Suppose a person starts eating toast, the first

toast gives him great pleasure. By the time he taking second he yield less satisfaction ;the satisfaction of third is less than that of second and so on. the additional satisfaction goes on decreasing with every successive toast till it drops down to zero; and if the consumer forced to take more the satisfaction may become zero.

This can also be shown by graph

20 15 10 5 Units of utility 0 -5 -10 -15 -20 1 2 3 4 5 6 7 8

Units of commodity

Diminishing marginal utility curve

LIMITATIONS OF THE LAW

Suitable units:- It is assumed that the commodity is

taken in suitable units.

Suitable time:-It is further assumed that the

commodity is taken within a certain time, otherwise law will not apply.
No change in consumers tastes:-Another

assumption is that the character of the consumers does not change.

Normal persons:- The law of diminising marginal

utility applies to normal persons and not to eccentric or abnormal persons like misers.

Constant income:-it is also essential that

the income remains the same. Any change in income will falsify the law.
Rare collections:- In case of rare

collections ,the law does not hold good.

Fashion:- Further, fashion utility depends on

fashion too.

Marginal utilities of related goods

There are two types of relationship

between goods:

1.They may be substitutes 2.They may be complementary goods

In case of substitutes
The substitutes are capable of satisfying same

want.eg tea and coffee, rail transport and road transport.

In case of such goods ,other things being

equal , the marginal utility of any such goods decreases as the quantity of the substitute goods with the consumer increases.

In case of complementary goods

Complementary goods are such goods which

are wanted together for the satisfaction of a want e.g., car and petrol.
In such cases other things remaining the

same, marginal utility increases as the quantities of the complementary goods with the consumer increase .

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