Principles Of EconomicsModel Lesson Plan Presentation Utility Kinds of Utility Law of Diminishing Marginal Utility(LDMU) Limitations of LDMU Importance of LDMU BY Mr. Seemab Qadeer Ass.Prof (Economics) Dep: Economics & Comm Geo DADC
UTILITY “An economic term referring to the total satisfaction received from consuming a good or service.” For Example, bread satisfies hunger, cloth satisfies the want for clothes & T.V. satisfies the want for entertainment. Same as, Muslims don’t eat pork. So they don’t have find utility in it. Europeans take both pork & beef. So they get utility from these products.
ASPECTS OF UTILITY 1-Initial Utility: The utility that the first unit of consumption gives is the initial utility. 2- Marginal utility:is the additional satisfaction, or amount of utility, gained from each extra unit of consumption. 3- Positive Utility:The utility above zero is the positive utility. 4- Zero Utility: When the consumer has fully satisfied his want &is not interested to use more units of the product its marginal utility would be zero. 5-Point of Satiety: When the marginal utility of the consumer is zero, his total utility will be maximum. This will be his point of satiety or the satisfaction of his want. 6- Negative Utility:If anyone continues consuming more units of consumption even after the point of satiety, his marginal utility would become negative. 7-Total Utility:The sum of utility of all the units of consumption will be total utility. These aspects of utility are explained with the help of a table on next slide.
Different Aspects of Utility (Schedule) Units of Marginal Utility Total Utility Consumption (UTILS) (UTILS) 1 8 Positive Utility 8 2 6 Positive Utility 8+ 6 = 14 3 4 Positive Utility 14 + 4 = 18 4 2 Positive Utility 18 + 2= 20 5 0) Zero Utility 20 + 0 = 20 6 -2) Negative Utility 20 – 2 = 18
Relationship b/w MU & TU • Up to first four units of consumption the marginal utility decreases but remains positive, total utility increases. Thus, so long as MU curve does not touch horizontal axis TU curve increases upward. • When marginal utility becomes zero the TU reaches its highest points.
LAW OF DIMINISHING MARGINAL UTILITY • What Does Law Of Diminishing Marginal Utility Mean?A law of economics stating that as a person increases consumption of a product - while keeping consumption of other products constant - there is a decline in the marginal utility that person derives from consuming each additional unit of that product. For example, say you go to a buffet and the first plate of food you eat is very good. On a scale of ten you would give it a ten. Now your hunger has been somewhat tamed, but you get another full plate of food. Since you're not as hungry, your enjoyment rates at a seven at best. Most people would stop before their utility drops even more, but say you go back to eat a third full plate of food and your utility drops even more to a three. If you kept eating, you would eventually reach a point at which your eating makes you sick, providing dissatisfaction, or 'dis-utility.
Prof. Alfred MarshallRepresentative of (LDMU) Alfred Marshall (born 26 July 1842 in Bermondsey, London, England, died 13 July 1924 in Cambridge, England) was an Englishman and one of the most influential economists of his time. His book, Principles of Economics (1890), was the dominant economic textbook in England for many years. It brings the ideas of supply and demand, marginal utility and costs of production into a coherent whole. He is known as one of the founders of neoclassical economics.
DEFINITION “ The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stock that he already has.” BY Prof. Alfred Marshall
ASSUMPTIONS OF LDMU • Nature of the commodity • Suitable unit • Continuous consumption • Taste n attitude of the consumer remains the same • Income of the consumer does not change
ASSUMPTIONS 1: Nature of the commodity should not change. If all units of the commodity consumed are not the same quality, the law will not apply. Example: Suppose a person consumes a second unit of a better quality as compared to the first, the utility of the second unit may not be less than the first. 2: Suitable unit if the units of consumption are not of normal size, the law may not apply. Example, if a thirsty person start drinking water by spoons, the marginal utility may increase instead of decreasing. 3: Continuous consumption unless and until the individual does not consume continuously his satisfaction will not fall. Example, A person drinks one glass of water in the morning and then drinks the next glass after an hour or two, the utility of the second may not be less than the first’s. Next
ASSUMPTIONS 4. Taste and attitude of the consumer remains the same This means in any case during consumption either the taste or attitude of the consumer changes the law may not apply. Example, a person has eats one mango n wants to eat no more. In the meantime a doctor tells him that mangoes are useful for his health. He may therefore get more utility from second mango then from the first. 5. Income of the consumer does not change otherwise this law will not apply. Example, a person purchases one electric fan n thinks that the fan bought is of less utility then the first. Meanwhile he comes to learn that his income has increased now he can purchase one which is of better quality n thus his satisfaction from the second unit will be more as compared to the first.
Limitations/Exceptions of Law of Diminishing Marginal Utility: The law is not applicable on the following factors and some of which are : 1: Knowledge 2: Wealth n Money 3: Drugs n Narcotics 4: Rare Articles 5: Articles of Fashion
Practical Importance of Law of Diminishing Marginal Utility: • It explains why demand curve falls from left to right When people get more quantity of a commodity, its marginal utility falls. It does not appear to them as attractive as before. Thus, they purchase additional quantity only when price falls. • It provides basis for progressive taxation Progressive taxation means when a persons income increases his rate of taxation increases too therefore the MU of money falls n gets less burdened if the rate of taxation as compared to the poor person is the same. Therefore for equality to prevail rate of tax should be higher for the rich people. • It indicates the need for redistribution of wealth The socialists advocate equal distribution of wealth on the basis that marginal utility of money for the rich is lower than for the poor. They say that if some wealth is taken away from the rich n distributed among the poor, total utility of the community increases. • It explains how a consumer gets maximum utility In order to get max. possible utility out of his income, a consumer should spend the amount in such a way that per rupee MU of all commodities purchased becomes equal.