Marshallian Approach Utility Approach Definition

Marshallian Approach

Utility Approach • Definition: • The want satisfying power of a commodity is known as utility. • Utility is a consumer’s perception of his or her own happiness or satisfaction-S. C. Maurice

Utility Approach • There is a difference between Utility and Satisfaction. • First we feel a want. • There is a commodity which has power to satisfy that want. • Consumption of the commodity. • As a result, our want is satisfied.

Basic Concepts • Total Utility: Total Utility is the sum of marginal utilities associated with the consumption of successive units. • TU =U 1+U 2+U 3+…. +UN • Marginal Utility: It is the change in total utility due to the consumption of one additional unit. -TU n-1 MUn=TUn-TU(n-1)

Basic Concepts • MU can be positive, negative or zero. • When consumption of additional units gives more satisfaction, MU is positive. • When additional consumption neither gives more satisfaction nor dissatisfaction, MU is zero. • When it causes more dissatisfaction then MU is negative. • MU is positive before the point of satiety is reached.

Law of Diminishing Marginal Utility • Definition: The more we have of a thing; the less we want additional increments of it-Chapman Assumptions: 1. All units must be homogeneous. 2. It holds good when process is continuous 3. No change in preferences and tastes. 4. Units must be of suitable size 5. Consumer must be rational. 6. No substitutes of the commodity are available

Exceptions • It is applicable only to a normal person. • It is not applicable in case of hobbies. • Sometimes, MU changes not with a change in our stock but with a change in other’sstock. • It doe not hold good when the income changes. • Commodities should be of normal type.

Importance of Law • It is basic law of consumption. • It explains phenomenon that price decreases with an increase in supply. • It also explains divergence between value in use and value in exchange. Sunshine has great value in use, but has no value-in-exchange. • It is the basis of progressive taxation. • It is of importance in determining the basic expenditure.

Law of Equi-Marginal Utility • Definition: If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has same marginal utility in all. • It means, MUx/Px =MUY/PY

Law of Equi-Marginal Utility • • • Assumptions: The consumer is rational. Income is limited and constant. MU of money is constant. The MU of commodity is independent of utilities of other commodities. • Utility is measurable in terms of money. • Perfect competition in market. • Prices and preferences remain constant.

Limitations of the Law • It assumes money can be measurable in money terms. • Commodities are independent and utilities are also independent. • It is assumed consumer has perfect knowledge of the market. • There is no budget period. • It assumes prices are given and constant. • When commodities are not available in market, then consumers have to buy less useful commodities.

Consumer Equilibrium • Consumer equilibrium is the state of the consumer’s demand which he thinks to be the best and which he does not want to alter.

Consumer Equilibrium Assumptions • • The consumer is rational. Income is limited and constant. MU of money is constant. The MU of commodity is independent of utilities of other commodities. • Utility is measurable in terms of money. • Perfect competition in market. • Prices and preferences remain constant

Consumer Equilibrium (Limitations) • Utility is assumed to be cardinal. • It assumes MU of money is constant. • It is assumed that utility of commodity depends on quantity of commodity alone. • It explains price effect only through substitution effect. • It is applicable to only one commodity.