CHAPTER 2 Flashcards
Meaning of Utility
Utility is the capacity of a commodity to satisfy human wants. In other words, utility is the want satisfying power of a good.
Features of Utility
-Relative Concept
-Subjective Concept
-Ethically neutral concept
-Utility differs from usefulness
-Utility differs from pleasure
-Utility differs from satisfaction
-Measurement of Utility is hypothetical
-Utility is multi-purpose
-Utility depends on the intensity of a want
-Utility is the basis of Demand
Types of Utility
Form utility
Place utility
Service utility
Knowledge utility
Possession utility
Time utility
Define Total utility
Total utility refers to the aggregate of utility derived by the consumer. It is an aggregate of utilities from all successive units of a commodity consumed.
Define Marginal Utility
Marginal utility refers to the additional utility derived by a consumer from an additional unit of a commodity consumed. In other words, it is the addition made by the last unit of a commodity consumed.
Law of Diminishing Marginal Utility was proposed and discussed by?
First discussed by Prof. Gossen but was discussed in detail by Prof. Alfred Marshall in his book ‘Principle of Economics’ published in 1890.
Statement of the Law:(Law of Diminishing Marginal Utility)
According to Prof. Alfred Marshall, “Other things remaining constant, the additional benefit which a person derives from a given increase in his stock of a thing, diminishes with every increase in the stock he already has”
Assumptions of the law of Diminishing Marginal utility
Rationality
Cardinal Measurement
Homogeneity
Continuity
Reasonability
Constancy
Divisibility
Single want
Exceptions to the law of diminishing marginal utility
Hobbies
Miser
Addictions
Power
Money
Criticisms of the law of diminishing marginal utility
Unrealistic assumptions
Cardinal Measurement
Indivisible goods
Constant Marginal utility of money
A single want
Significance of the Law
Usefulness to the consumers
Useful to the government
Basis of Paradox of values
Basis of Law of Demand
What are Intra Marginal Units
Units which a consumer willingly buys because MU is greater than price are called intra marginal units(MUx>px)
What are Marginal Units
Unit at which MU becomes equal with market price is “Marginal unit”. (MUx=Px)=Consumer’s Equilibrium.
What are extra marginal units
Units which a rational consumer is not willing to buy and consume where he has to pay more than the MU are called “Extra marginal units”(MUx<Px)
Hobbies violate which assumptions of the DMU?
Hobbies violate the assumptions of homogeneity and continuity.
A Miser ignores which assumption of the law of DMU?
A Miser ignores the assumption of Rationality.
Addictions violate which assumption of the law of DMU?
Addictions violate the assumption of rationality.
Power violates which assumption of the Law of DMU?
Power violates the assumption of Rationality.
