A2

UTILITY
➝Utility Is the satisfaction derived by a consumer from the consumption of a commodity (goods)
or services. The terms utility and satisfaction are similar.

The TOTAL UTILITY [TU] is the total amount of satisfaction derived by a consumer from the
consumption of a given quantity of a commodity and services.It is the sum of MARGINAL
UTILITY [MU].

∴TU=ΣMU ​Note​; Unit of utility is UTILS

∴MU=​ΔTU​ AU-AVERAGE UTILITY
ΔQ
∴AU=​TU
Q

Marginal Utility [MU] is the utility derived from the consumption of an additional utility of a
commodity.
Relationship between TU, MU and AU.

Table u.1

Quantity of good MU TU AU
x consumed.

1 12 12 12

2 10 22 11

3 8 30 10

4 6 36 9

5 4 40 8

6 2 42 7

7 0 42 6
The marginal utility starts to decrease after consuming an extra unit of a commodity or services
(in above case; good x). Hence, the marginal utility is maximum when consuming the first unit
and total utility is at lowest. Bur, the total utility is at maximum when marginal utility is at
minimum i.e. MU=0. Therefore, this can be explained by the ​Law of diminishing marginal utility​.

Before explaining ​Law of diminishing marginal utility​, the assumptions for this law to work are as
follows:-
1. Each unit of commodity and services consumed must be homogenous and of standard
size. Example; 200 ml Coca-cola consumed one after another.
2. Consumption must be continuous.
3. Only one commodity must be consumed at a time. Example; when consuming Coca-cola
other things must not be consumed.
4. Income(Y) must be constant.
5. No substitutes or complements.
6. Consumers must be RATIONAL.

Also, there are exceptions for this law to not work. Thus, they are as follow:-
1. Personal aspects. Example; wearing diamond and gold jewellery.
2. Intoxicants. (Irrational behaviour)
3. Hobby/ies.
Diagram u.2

Law of diminishing marginal utility​; ​according to this law the marginal utility derived from the
successive units consumed decreases as the quantity of a commodity consumed by a
consumer increases.
Table u.3
Quantity of good x consumed MU

1 12

2 10

3 8

4 6

5 4

6 2

7 0

8 -2

As seen in the table u.3, the quantity of good x consumed by a consumer increases from one
(1) unit to eight (8) units, the marginal utility [MU] decreases from twelve (12) utils to minus two
(-2) utils. The consumers, want to consume good x is completely satisfied when the consumer
consumes 7 units. (Applicable only for this case). Therefore, at this point marginal utility [MU] is
zero (0) meaning total utility [TU] is maximum. So, a rational consumer consumes till seven (7)
units.

Diagram u.4
Here, the slope of marginal utility [MU] curve shows the decreasing function of the curve as a
consumer consumes an extra additional unit of commodity (Good x).

Deriving the individual demand curve from the ​Law of diminishing marginal utility​.

➝According to this law, the utility derived from the successive unit of commodity or services
decreases as a consumer consumes an extra more unit of the commodity or services. Due to
this reason, a rational consumer will not consume the successive unit of the commodity of the
same price​. So, they will consume the additional commodity only when it’s price falls. This is
because a rational consumer assigns lower value to the commodity or services that yield lower
satisfaction. So, the quantity consumed increases when the price of a commodity decreases.

Marginal utility derived from a commodity or services and the value assigned by the consumers:
Table u.5
Quantity consumed MU Value assigned / Price paid
by consumer.

1 19 $50

2 8 $40

3 6 $30

4 4 $20
Diagram u.6

Here, DD is the individual demand curve derived from the law of diminishing marginal utility
[MU], means that it shows the consumer consumes additional units of the commodity or
services only when the price falls (↓).

#Concept of consumer’s equilibrium

➝The main aim of consumers is to maximize utility/satisfaction. A consumer reaches a state of

equilibrium when he derives maximum satisfaction using limited money income. A rational
consumer goes on changing his pattern of expenditure until his satisfaction is maximized. Once
his satisfaction is maximized, the consumer attains a state of equilibrium and any further change
in his pattern of expenditure will reduce his satisfaction. Furthermore, this concept of
consumer’s equilibrium can be explained using the equimarginal principle.
➝​The equimarginal principle states that; a consumer satisfaction is maximized when he
allocates his limited money income among two or more commodity or services in such a manner
that the marginal utility [MU] derived per unit of money spent on each commodity or services is
equalized. So, a rational consumer will continue to change his expenditure pattern until he
derived equal marginal utility [MU] from the money spent on each commodity or services. Once,
the marginal utility [MU] derived per unit of money, spent on each commodity or services is
equalized, the consumer reaches equimarginal with maximum satisfaction.

Mathematically:- ​MUx​ = ​MUy​ = (Y)→Money Income of consumer.

Px Py

#Equilibrium condition.
1. MUx​ = ​MUy
Px Py
2. Whole income (Y) must be spent.

*Money Income (Y)=$60

*Price of good x=$10
*Price of good y=$5
Table u.7
MUx MUy
Units MUx MUy Px Py

1 100 35 10 7

2 90 30 9 6

3 80 25 8 5

4 70 20 7 4

5 60 15 6 3

6 50 10 5 2

❌
Unit 4/5/6 may give equilibrium condition but,...
➝4 unit of x & 1 unit of y = $45( )

❌
➝5 unit of x & 2 unit of y = $60(✔)
➝6 unit of x & 3 unit of y = $75( )
Thus,consumers can maximize their satisfaction when they consume 5 units of good x and 2
units of good y. Also, at this point ​MUx​ = ​MUy​ and they have spent their whole income.
Px Py
Ranib Sainju.