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ECON > Utility Analysis > Flashcards

Utility Analysis Flashcards

1
Q

Features of utility

A
  1. Multipurpose
  2. Relative concept
  3. Subjective concept
  4. Basis of law of demand
  5. measurement of utlity is hypothetical
  6. Depends on intensity of want
  7. Differs from usefulness
  8. Differs from satisfaction
  9. Differs from pleasure
  10. Ethically neutral concept
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2
Q

Utlity is multipurpose

A

A commodity can satisfy the want of more than one person and it can also be used for various purposes.
for eg: electricity

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3
Q

Utility is a relative concept

A

It is related to time and place. it differs from time to time and place to place.
For eg: woollen clothes have more utility in the winter and sand has more utility on a construction site

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4
Q

Utlity is a subjective concept

A

It is a psychological concept. it changes from person to person. this may be due to tastes, likes, dislikes, habits, profession etc
for eg: a knife has more utility to a chef than a teacher.

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5
Q

Utility is the basis of law of demand

A

A person will demand a commodity only if it gives utility to him. for eg: a sik person has utility in medicines hence he demands it

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6
Q

Measurement of utility is hypothetical

A

Utility is an abstract concept. cardinal or numerical measurement of utility is not possible.
eg: a thristy person after drinking water may experience higher or lower utility. thus utility can only be experienced and found either positive, negative or zero

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7
Q

Utility is based on intensity of want

A

Utility depends on intensity of want. more intense the want, greater will be the utility. as and when the urgency of want declines, utility diminishes.
eg: a hungry person has more utility for food than a personn who is not hungry

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8
Q

Utility differs from usefulness

A

Utility is the want satisfying power of a commodity while usefulness is the value in use of the commodity
for eg: milk has both utility and usefulness however liquor only has utility to an addict but not usefulness

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9
Q

Utility differs from satisfaction

A

Utility is a cause of consumption wheras satisfaction is the end result of consumption. they are interrelated but different concepts.
For eg: a thristy person drinks water because water has the utility to satisfy thrist. utility of water is the cause of consumption and the satisfaction derived is the end result of consumption.

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10
Q

Utility differs from pleasure

A

A commodity may possess utility but it may not give pleasure.
for eg: an injection for a patient has utility because it cures the ailment but it does not provide any pleasure or enjoyment

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11
Q

Utility is an ethically neutral concept

A

The concept of utility has no ethical consideration. it is a morally colourless concept. the commodity should satisfy any want without the consideration of what is good or bad, desirable or undesirable.
for eg: a knife has the utility to cut fruits as well as harm someone. both wants are of different types yet are satisfied by the same commodity.

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12
Q

Types of utility

A
  1. Form utility
  2. Place utility
  3. Time utility
  4. Possesion utility
  5. Knowledge utility
  6. Service utility
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13
Q

Form utility

A

When utility is created due to a change in the shape or structure of an existing material, it is known as form utility
for eg: toys made of clay, furniture from wood, etc

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14
Q

Place utility

A

When utility increases due to chnage in place of consumption , it is called place utility.
for eg: woollen clothes at colder places.
Transport creates place utility

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15
Q

Time utility

A

When utility increases due to chnage in time of its utilization, it is called time utility
for eg: air conditioners have more utility during the summer rather than the winter
Time utility is also observed when goods are stored and used during the time of scarcity.
for eg: blood banks

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16
Q

Possession utility

A

Possession utility arises when the possession of goods is transferred from one person to another.
for eg: transfer of goods from sellers to buyers

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17
Q

Service utility

A

It arises when personal services are rendered by various professionals.
for eg: services of doctors, lawyers, etc

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18
Q

Knowledge utility

A

When a consumer acquires knowledge about a particular product, it is called knowledge utility.
for eg: the utility of a cell phone increases when a person knows about its various functions

19
Q

Concepts of utility

A
  1. Total utility
  2. Marginal utility
20
Q

Total utility

A

It refers to the aggregate of utility derived by the consumer from all units of a commodity consumed.
It is an aggregate of utilities from all successive units consumed

21
Q

Marginal utility

A

It refers to the additional utility derived by a consumer by an additional unit of a commodity consumed. in other words, it is the addition made by the last unit of a commodity consumed

22
Q

Relationship between tu and mu

A
  1. Tu and MU of the very first unit of x consumed, are the same.
  2. As the consumer consumes further units of x, the total utility increases at a diminishing rate and marginal utility goes on diminishing.
  3. At a particular stage, total utility reaches its maximum and remains constant whereas marginal utility becomes zero. This is called the point of satiety.
  4. After this point, any additional unit of x consumed further results in a decline in the total utility, while marginal utility becomes zero.
  5. After reaching the point of satiety, a rational consumer should stop his consumption since the maximum limit of satisfaction is reached and there is no addition to TU with further consumption.
  6. Consumption beyond this point turns satisfaction into dissatisfaction. In other words, consumer starts experiencing ill effects of consumption
23
Q

Intro to the Law of DMU

A

This law was first proposed by Prof. Gossen but was later discussed in detail by Prof. Alfred Marshall in his book “Principles of Economics” in 1890.
This law is universal in character. It is based on the common consumer behaviour that utility derived diminishes with the reduction in the intensity of want

24
Q

Statement of the law of DMU

A

According to Prof. Marshall, “Other things remaining constant, the additional benefit that a person derives from a given increase in his stock of a thing, diminishes with every increase in the stock that he already has”
In other words, MU that a consumer derives from successive units of a commodity goes on diminishing as his or her consumption of that commodity increases.
In short, the more of a thing you have, the less you want more of it

25
Q

Assumptions

A
  1. Divisibility
  2. Reasonability
  3. Rationality
  4. Homogeneity
  5. Single want
  6. Constancy
  7. Continuity
  8. Cardinal measurement
26
Q

Divisibility

A

The law assumes that the commodity being consumed is divisible so that it can be acquired in small quantities

27
Q

Rationality

A

Consumer is assumed to be rational.
It means his behaviour is normal and he tries to maximize his satisfaction

28
Q

Reasonability

A

All units of a commodity consumed are of reasonable size. they are neither too big nor too small

29
Q

Homogeneity

A

All units of a commodity consumed are exactly homogeneous or identical in shape, size, colour,taste, etc

30
Q

Single want

A

A given commodity can satisfy the want of a single person. The law assumes an experience of single want which is completely satiable at a given point of time

31
Q

Cardinal measurement

A

The law assumes that utility can be cardinally or numerically measured. hence mathematical operations are easily possible to know and compare the utility derived from each unit

32
Q

Continuity

A

All units of a commodity are consumed in quick succession without any lapse in time

33
Q

Constancy

A

The law assumes other factors such as income, tastes, habits, likes, dislikes, choices of a consumer should remain constant.
MU of money is also assumed to be constant

34
Q

Exceptions

A
  1. Hobbies
  2. Miser
  3. Money
  4. Addictions
  5. Power
35
Q

Hobbies

A

In certain hobbies such as reading, music, collection of rare paintings, this law does not hold true as every additional increase in the stock gives more pleasure. This increases MU.
However, this violates the assumption of homogeneity and continuity

36
Q

Miser

A

In the case of a miser, every additional rupee gives him more and more satisfaction. MU of money tends to increase with an increase in his stock of money
However this ignores the assumption of rationality

37
Q

Money

A

It is said that MU of money never becomes zero. It increases when the stock of money increases. This is because money is a medium of exchange through which we buy various things
However, according to some economists, this law is applicable to money as well.
For eg: MU of money is more for a poor person than a rich person

38
Q

Addictions

A

In the case of a drunkard, every additional unit of liquor increases the level of toxication. So MU received by drunkard may increase. However this is an illusion. This is true in the case of all addicts. This violates the assumption of rationality

39
Q

Power

A

Because when a person acquires power, his lust for power increases. he desires to have more and more of it. however this again violates the assumption of rationality

40
Q

Significance

A
  1. Basis of paradox of value
  2. Useful to consumers
  3. Basis of law of demand
  4. Useful to government
41
Q

Basis of paradox of value

A

It helps us understand the paradox of value
This includes goods that have more value in use but no value in exchange such as air, etc., and goods that have more value in exchange and less value in use such as gold, silver, etc

42
Q

Useful to consumers

A

It creates awareness among consumers
To obtain maximum satisfaction, we need to diversify the consumption

43
Q

Basis of law of demand

A
  1. Law of demand is based on this law
  2. According to the law of demand, quantity demanded of a commodity increases with fall in price and decreases with rise in price.’
  3. When consumers purchase more and more of a product, its MU steadily decreases. Hence , he wants to buy more units only at lower prices
44
Q

Useful to the government

A

Useful in framing various policies such as progressive tax policy, trade policy, pricing policy, etc

ECON (8 decks)

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