1. What is Utility? Explain its types.
Ans:- Utility is one of the important concept in economic. Marshallian utility analysis is based on cardinal measurement of utility. Utility is measurable in term of money such as 1, 2, 3, 4, 5, So on. The price of commodity and its marginal utility is always equal to each other.
In general, utility means usefulness of goods but in economic usefulness is nothing, those goods who satisfied human want is called utility. For e.g.:- wine is harmful to health, but they satisfied human want. Therefore, it has utility. In this way it has the capacity of commodity to satisfied human want.
Utility can be divided into three part:-
a. Total utility
b. Average utility
c. Marginal utility
a. Total utility:-
Ans:- The sum of utility by difference consumption unit is called total utility.
b. Average utility:-
Ans:- Average utility is the outcome of total utility. Average utility can be obtain total utility divided by number of consumption for marginal utility.
c. Marginal utility:-
Ans:- The marginal utility of any quantity of commodity is increase in total utility which result from an unit increase in consumption. In other word marginal utility is addition made to total utility while one more unit consume or the consumption of last unit is called marginal utility and the utility form marginal unit is called marginal utility.
2. Explain the relation between Total utility and marginal utility?
Ans:- There are three relation between total utility and marginal utility. Such relation can be explain as follow:-
a. If consumer consume more and more units of commodity its marginal utility decline and total utility increase.
b. If marginal utility is zero, total utility is maximum.
c. If marginal utility is negative, total utility is decline.
It can be explain by a schedule:-
| Unit of commodity | Marginal utility | Total utility |
| 1 2 3 4 5 6 7 | 10 8 6 4 2 0 -2 | 10 18 24 28 30 30 28 |
According to his schedule, if consumers consume more and more units of commodity its marginal utility is decline and total utility is increase. At 6 units, marginal utility is zero then total utility is maximum. At 7units marginal utility is negative, total utility decline.
3. Explain the law of Diminishing marginal utility?
Ans:- Law of diminishing marginal utility is one of the important theory of consumption. This theory was at first pointed out by H.H Gossen in 1854 A.D. due to this theory is also known as first ”law of Gossen ”. But he couldn’t developed it, the credit is given Alfred Marshall for the development of this theory. This theory explains universal human behavior
According to Marshall. ” The additional benefits which person derived from a given increase of his stock of a thing diminishes, with every increase of his stock that he already have.”
This theory is based on some assumption such as:-
a. Units of the commodity should be proper or suitable.
b. All the units of commodity should be uniformed in quality and quantity.
c. The process of consumption should be continuous.
d. There should not be changed in mental condition of consumer.
e. If the consumption period is long consumer income, habit, test should remain the same.
This theory can be explained by a schedule:-
| Units of commodity | Marginal utility |
| 1234567 | 201612840-4 |
According to this schedule, If a consumer consume more and more units of a commodity its marginal utility decline. At 6 units marginal utility is ‘0’ zero because he is fully satisfied. At 7 units, he gets negative marginal utility. In this way, this theory shows the relationship between different units of commodity and it marginal utility. It can be explain by diagram:-
In this diagram, ‘OY’-axis represents marginal utility and ‘OX’-represents units of commodity. DD is the diminishing marginal utility curve. if consumer consume first (1) units of commodity he gets 20 marginal utility. 16 from 2 Units, 12 from 3 units, 8 form 4 units, 4 form 5 units, 0 from 6 unit and -4 from 7 units.
4. Explain Limitation or Exception of law of diminishing marginal utility?
Ans:- There are several exception or limitation of the law of diminishing marginal utility. But these are not real exception. This theory is universal law, it is applicable in everywhere. The important exception of this theory can be explained as follow:-
a. Rare and curious good:-
Ans:-There are several rare and curious goods consumed by consumers. For example – old coins, and so on. In case of these goods, the marginal utility goes on increasing rather than decreasing. So, the law of diminishing marginal utility does not hold true.
b. Habitual goods:-
Ans:- Several consumers may be habitual with different goods like- cigarettes alcohol, drugs, etc. when the consumes consume more and more units of such goods, the additional level of satisfaction goes on increasing rather than decreasing.
c. Changing taste and preference:-
Ans:- The law is applicable if and only if the taste and preference of the consumer remains constant. In case of changing taste and preference the law is not applicable.
d. Goods of entertainment :-
Ans:- The law of diminishing marginal utility is not applicable in case of goods of entertainment like: watching movies, popular T.V programs popular games like football, T 20 cricket, etc. the future watching of these provides entertainment and thus satisfaction does not decrease.
e. Utilities cannot be measured in cardinal number:-
Ans:- This theory assumes that the satisfaction can be measured in utils. But, the critics said that utility is internal feeling of the consumer, it differs person wise and so it cannot be measured in number. But it can ranked like more or less.
5. Explain the importance of law of diminishing marginal utility?
Ans:- There are several importance of law of diminishing marginal utility. This theory is an universal law of consumption. Due to this theory is applicable in everywhere. The main important of this theory can explain as follow:-
a. Basis of economic laws:-
Ans :- The different economic laws are based on the law of diminishing marginal utility. Such as law of demand, elasticity of demand, law of substitution, consumer surplus and so on.
b. Determination of taxation:-
Ans:- This theory is also important in the determination of taxation. Modern tax structure is also based on this theory. If quantity of money increases, its marginal utility decrease. Due to this government imposes more tax on rich man and less tax on poor man.
c. Determination of market price:-
Ans:- This theory is also useful in the determination of market price. If the stock of commodity increase consumer gets less utility for the commodity and quantity demanded decrease. Due to this, a producer charges less price for the commodity. Similarly, if the stock of commodity decrease consumer get more utility for the commodity and quantity demanded increase. Due to this, a producer charges high price for the commodity.
d. Basic socialism:-
Ans:- This theory is also based on the concept of socialism. The government imposes more tax on rich and less tax on poor, it is related to concept of socialism. In this way more burden of tax falls on rich and less on poor.
6. Explain the law of Substitution?
Ans:- Law of substitution also another important theory of consumption. This theory was at first introduce by H.H Gossen in same time 1854 A.D. Due to this theory is called ”second law of Gossen.” But he couldn’t develop it, the credit is given to Alfred Marshall for the development of this theory. This theory is also known as law of equi-marginal utility, law of maximum satisfaction and so on. The law of proportionality is called by modern economist.
According to Marshall,” if person has commodity which he can put to several uses, he will distribute it between these uses in such a way that it has the same marginal utility in all.”
This theory is based on some assumption such as:-
a. Utility is measurable in term of money.
b. Marginal utility of money is constant.
c. He has perfect knowledge of utility derives.
d. Income of consumer are fixed.
e. Goods are substitutable.
f. Consumer is rational man. He always try to get maximum satisfaction
If consumer has 8 coins of Re.1.how he will speed his all coins on two commodity then the marginal utility from both commodity are equal. It can be explain by schedule.
| Units of commodity(coins ) | Marginal utility of wheat | Marginal utility of sugar |
| 12345678 | 18 16141210864 | 14121086420 |
According to this schedule, if consumer will spend 5 unit of coins on wheat and 3 unit of coins on sugar then the marginal utility from both commodity are equal. First and second units of coins, he will must spend on wheat because marginal is higher. It can be explain by a diagram:-
In this diagram, OY-axis represent marginal utility of commodity and OX-axis represent unit of coins. ‘TT’ curve represent marginal utility of sugar and ‘LL’ is marginal utility of wheat. ‘QQ’ curve represent marginal utility both commodity. If consumer will spend 3 unit of coins on sugar and 5 unit of coins on wheat then the marginal utility from both commodity are equal (10). OR CD=EF. In this way. A consumer gets maximum satisfaction.
7. Explain the Limitation or Criticism of law of substitution?
Ans:- this theory can be criticized or several ground such as:-
a. Utility is not measurable:-
This theory is based on cardinal measurement of utility but it is not a realistic concept. Utility is psychological concept. The measurement of utility is quit impossible, money only measure the intensity of desire not utility from goods.
b. Ignorance:-
Ans:- Due to ignorance, the consumer can’t judge where utility is higher or lower. They can’t maximize satisfaction by equalized marginal utility in all uses. In this way, marginal utility from his spend can’t be equalized due to ignorance of consumer.
c. Social custom and fashion:-
Ans:- The consumer doesn’t behave rationally all the time, his behavior is influenced by social custom or fashion, advertising and so on. They don’t try to spend so as to maximum.
d. Indivisibility:-
Ans :- some goods like T.V. set, Refrezigator, motor car, laptop, motor cycle are indivisible goods. For this law of hold goods should be divisible and substitutable. In this way, in the case of indivisible goods this theory is not applicable.
e. Change in price of commodity:-
Ans:- there is inverse relation between price and marginal utility of commodity. If price of commodity increase, its marginal utility decrease. Similarly, price of commodity decrease, its marginal utility increase. In this way, the marginal utility of commodity change with change in price. Hence, marginal utility is not always constant.
8. Explain the Importance of law of substitution?
Ans:- This theory has great significant in every field of human life. The main importance of this theory can be explain as follows:-
a. In the field of consumption:-
Ans:- This theory importance in the field of consumption. Humans wants are unlimited but resources are limited. How a consumer get maximum satisfaction from limited resource. He will get maximum satisfaction only when he obtain equal marginal utility the consumption of different commodities. He substitute one commodity for another utility the marginal utility from both commodity are equal.
b. In the field production:-
Ans:- This theory is also important in the field of production. The main aim of producer is to get maximum profit for this, he should select the best combination of the factor of production. He should spend more on the factor which yield highest returns. He should substitute one factor for another fill the marginal producing of all factor are equal.
c. In the field of exchange:-
Ans:- This theory is useful in the field of exchange, exchange is the link between production and consumption. Exchange in realty is the substitution one commodity for another. The process of exchange should be continuous when the marginal utility from both commodities are equal.
d. In the field of distribution:-
Ans:-This theory is also useful in the field of distribution. National income is combine effort four factor of production such as land, labour, capital and organization. Every factors of production receive their remuneration on the basis of their marginal. Productivity. In this way, on the basis of their marginal productivity land receive rent, labour wages, capital receive interest and entrepreneur receive profit.
e. In the field of public finance:-
Ans:- This theory is also most important in the field of public finance. The government imposes more on the rich than to then poor so that the burden of taxation is equal. The government spend more on the welfare a poor than to the rich that the benefits of expenditure is equal.
9. Explain the concept of Consumers surplus?
Ans :- Consumers surplus is one of the important theory in Marshallian utility analysis. This theory was at first introduce by ‘A French engineer Dupuit’ in 1844 A.D. But he couldn’t developed it. The credit is given to Aflred Marshall for the development of this theory. Marshall first named this theory ‘Consumers Rent’ in his book pure theory of domestic value and later renamed ‘consumer surplus in this famous book” principle of economic.’
This theory is based law of diminishing marginal utility. A consumer is willing to pay the price for a commodity up to its marginal utility, compared with the marginal utility of money which he has to pay. If marginal utility of commodity is higher while its actual market price is lower consumer derived extra satisfaction i.e consumer surplus.
According to person, ”The difference between what we would be pay and what we have to pay is called consume surplus.”
This theory is based on some assumption such as:–
a. Utility is measurement in term of money.
b. Marginal utility of money is constant.
c. There is no substitute goods of the commodity.
d. The goods in dependent or marginal utility of one goods doesn’t related to marginal utility of other goods.
e. The consumer income habit fashion should be remain the same.
It can be explain by schedule:-
| Unit of commodity | Potential price marginal utility | Actual price market price | Consumer surplus |
| 123456 | 1098765 | 555555 | 10-5=59-5=48-5=37-5=26-5=15-5=0 |
| Total units of commodity =6 | T.U = 45 | Total money spend = 30 | Total C.S = 15 |
According to this schedule, ” if consumer consume more and more unit of commodity, its marginal utility decline or potential price is always higher than the actual price so, consumer get consumer get surplus. At 6 units of commodity, potential price and actual price is equal to each so, there is no consumer surplus. It can be explain with the help of diagram:-
In this diagram, OY-axis represents marginal utility of commodity and OX-axis represents units of commodity. If a consumer will spend first units of commodity he gets 10 marginal utility and 5 consumer surplus, form 3 units marginal utility 9and consumer surplus is 4 and so on.