Utility is the power or capacity of a

commodity to satisfy human wants.

As long as a commodity has some use i.e. ,
it has the capacity to satisfy a person –it
has the UTILIY.
1. Utility is subjective(deals with mental
satisfaction)
2. Utility is Relative(does not remain
constant)
3. Not essentially useful.
1. Total Utility- TU refers to the entire
amount of satisfaction obtained from
consuming various quantities of a
commodity.
TUx = F(Qs)
2. Marginal Utility – MU is the increase in TU
which results from a unit increase in
consumption.
MU = ∆TU
-----
∆Q
Q ($)TU ($) MU
0 0
1 40 40
2 85 45
3 120 35
4 140 20
5 150 10
6 157 7
7 160 3
8 160 0
9 155 -5
10 145 -10
145

5
 Total Utility

200
Q ($) TU ($) MU
150
0 0
100
1 40 40
50
2 85 45
0
1 2 3 4 5 6 7 8 9 10 11 3 120 35
4 140 20
5 150 10
($) M U
6 157 7
50 7 160 3
40

30
8 160 0
20 9 155 -5
10 145 -10
10

-10
1 2 3 4 5 6 7 8 9 1 11
145
-20

6
IC analysis refers to the locus of points
representing the various combinations of
two goods which yields the same level of
satisfaction to the consumer.
 1 Rationality- (maximum satisfaction)

 2Ordinal Utility-(consumer can rank his

preferences)

 3Diminishing marginal rate of

substitution(the rate at which certain
amount of one commodity is substituted for
another is called MRS)
4. Axioms of comparison-Any 2
combinations of X & Y commodities can be
compared in preference by an individual-
A) A is preferred to B.
B) B is preferred to A.
C) A&B are indifferent
 5.Consistency

 6. Transitivity- Assumes there are three

combinations of goods –A,B,C. If A is
preferred to B and B is preferred to C ,then
A must be preferred to C .

 7. Scale of preference independent of

market price.
COMBINATION GOOD X GOOD Y

A 2 18

B 4 13

C 6 9

D 8 6
 Higher indifference curves represent larger
quantities of goods than lower
indifference curves.
A consumer is willing to give up one good
only if he or she gets more of the other
good in order to remain equally happy.
If the quantity of one good is reduced, the
quantity of the other good must increase.
For this reason, most indifference curves
slope downward.
 
 Perfect Perfect
QY
Complement QY Substitutes
s

QX QX
PRICE LINE OR BUDGET LINE-

It shows all the different combinations of the

two commodities that a consumer can
purchase ,given his money income and the
price of the two commodities.
 It is a straight line.
 It has a negative slope.
 Its slope indicates ratio of prices of two

goods.
20
 Combination of goods that maximizes utility
for a given set of prices and a given level of
income
 Represented graphically by the point of

tangency between an indifference curve

and the budget line
◦ MUX/MUY = PX/PY
◦ MUX/PX = MUY/PY