Utility & Demand Analysis.pptx
- 1. Utility & Demand Analysis
- 2. consumer choice • Demand for a commodity is determined by various factors, including income and tastes of the consumer and price of the commodity. • Underlying Assumptions
- 3. Completeness a. pizza is preferred to burger; or b. burger is preferred to pizza; or c. the consumer is indifferent between pizza and burger.
- 4. Transitivity • This assumption implies that an individual consumer’s preferences are always consistent.
- 5. Non-satiation • A consumer is never satiated permanently. • More is always wanted; if “some” is good, “more” of the good is better.
- 6. Utility Analysis • Utility is the satisfaction a consumer derives out of consumption of a commodity. • If an individual consumes quantity m1 of a commodity M, quantity n1 of N, and r1 of R, then the utility function U of the consumer can be expressed as • U = f(m1, n1, r1)
- 7. Cardinal Utility • According to cardinalists, utility is a cardinal concept, and we can assign number of utils to any commodity. • Total utility refers to the sum total of utility levels out of each unit of a commodity consumed within a given period of time.
- 8. Total and Marginal Utility • Total utility (TU) refers to the sum total of utility levels out of each unit of a commodity consumed within a given period of time, or in other words, total satisfaction from consumption. • Marginal utility (MU) is the change in total utility due to a unit change in the commodity consumed within a given period of time.
- 9. Law of Diminishing Marginal Utility • As per the law of diminishing marginal utility, marginal utility for successive units consumed goes on decreasing.
- 13. Assumptions • The Unit of Consumption must be a Standard One • Consumption must be Continuous • Multiple Units of the Commodity should be Consumed • The Tastes and Preferences of the Consumer should Remain Unchanged during the Course of Consumption • The Good should be Normal and Not Addictive in Nature
- 14. Law of Equimarginal Utility • As per the law of equimarginal utility, marginal utilities of all commodities should be equal.
- 16. Ordinal Utility • According to ordinal utility theory, utility cannot be measured in physical units rather the consumer can only rank utility derived from various commodities
- 17. Indifference Curve Analysis • According to ordinal school, a consumer is able to rank different combinations of the commodities in order of preference or indifference. • Indifference curve as the locus of points which show the different combinations of two commodities a consumer is indifferent about.
- 21. Assumptions • At any given point of time, the consumer has only two goods in his/her consumption basket. • It is not possible to quantify the utility availed from the consumption rather the consumer is able to rank his/her preferences on a scale. • The consumer is never completely satisfied; this is in accordance to the assumption on nonsatiation you have read earlier in this chapter. In other words, more is always wanted.
- 22. • The consumer is consistent in his choices. • This implies that if a consumer is indifferent between butter and ghee, and between ghee and cheese, he would be indifferent between butter and cheese as well. • The two goods under consideration are perfectly divisible in small units. This implies that indifference curves would be continuous in nature.
- 23. Properties of Indifference Curves • Downward Sloping • Higher Indifference Curve Represents Higher Utility • Indifference Curves can Never Intersect • Convex to the Origin
- 26. Diminishing Marginal Rate of Substitution • MRS is the proportion of one good that the consumer would be willing to give up for more of another.
- 28. Indifference Curves and Utility Analysis
- 29. Special Types of Indifference Curves
- 34. Consumer’s Equilibrium • Consumer’s equilibrium is at the point where the budget line is tangent to the highest attainable indifference curve by the consumer, subject to budget constraint.
- 36. conditions for consumer’s equilibrium • The consumer spends all income in buying the two commodities; hence the point of equilibrium will always lie on the budget line. • The point of equilibrium will always be on the highest possible indifference curve the consumer can reach with the given budget line. Any other combination of the two goods below the budget line AB would provide less utility. • At the optimum bundle, slope of the indifference curve should be equal to the slope of the budget line.
- 37. consumer surplus • Consumer surplus is the difference between the price consumers are willing to pay and what they actually pay.
- 39. DEMAND • Demand is the quantity of a commodity which consumers are willing to buy at a given price for a particular unit of time. • Demand is defined as that want, need or desire which is backed by willingness and ability to buy a particular commodity, in a given period of time.
- 40. Types of Demand • Direct and Derived Demand • When a commodity is demanded for its own sake by the final consumer it is known as consumer good and its demand is direct demand. • A capital good is demanded for using it either as a raw material or as an intermediary and its demand is derived demand.
- 41. • Recurring and Replacement Demand • Consumable goods have recurring demand; durable consumer goods are purchased to be used for a long time but they need replacement. • Complementary and Competing Demand • Goods which create joint demand are complementary goods. • Goods that compete with each other to satisfy any particular want are called substitutes • Demand for Consumer Goods and Capital Goods • Demand for Perishable Goods and Durable Goods • Individual and Market Demand
- 42. Determinants of Demand • Price of the Product • Income of the Consumer • Price of Related Goods • Tastes and Preferences • Advertising • Consumer’s Expectation of Future Income and Price • Population • Growth of Economy • Consumer Credit
- 43. LAW OF DEMAND • It state that other things remaining constant, (ceteris paribus) when the price of a commodity rises, the demand for that commodity falls and when the price of a commodity falls, the demand for that commodity rises