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Unit II,

Chapter I
Human Wants, necessary,
comfort, luxuries
"Human wants" are those things that people
desire to have above what they truly need in
order to live. Only a limited number of needs
actually exists, but wants are virtually unlimited,
restricted only by a person's imagination.
1. Wants are unlimited in numbers
2. Wants are satiable
3. Wants are competitive
4. Wants are complementary
5. Wants are alternative
6 Wants recur ( Return)
7. Wants differ in Importance
8. Wants can be created in salesmanship
Goods are things which have power to satisfy a
wants is called utility. The power to satisfy a
wants is called utility. There fore goods are
those things that possess utility. Services of
doctors, layers, teachers, soldiers etc.
We consume a commodity or good to satisfy
our wants. Human being have several wants.
To satisfy human wants, goods have to be
produce, human wants are the starting point
of all economic activity.
Form utility
Time Utility
Place Utility
Services utility

Utility refers to the amount of satisfaction a person


gets from consumption of a certain items. and
marginal utility refers to the addition made to total
utility, we get after consuming one more unit.

An individual's wants are unlimited in number yet


each individual's want is satiable. Because of this,
the more we have a commodity, the less we want
to have more of it.
This law state that as the amount consumed of a
commodity increases, the utility derived by the
consumer from the additional units, i.e marginal
utility goes on decreasing.
Suitable quantity of consumption
Uniform quality and size of the commodity
No gap in time
No change in the mental condition of the
consumer during consumption
No change in fashion and taste
Constant income
No change in the price of the commodity or its
substitutes
As more and more quantity of a commodity is
consumed, the intensity if desire decreases and
also the utility derived from the additional unit.

Suppose a person eats Bread. and 1st unit of bread


gives him maximum satisfaction. When he will ead
2nd bread his total satisfaction would increase. But
the utility added by 2nd bread(MU) is less then the
1st bread. His Total utility and marginal utility can
be put in the form of a following schedule.
Here, from the MU curve we can see that MU is
declining as consumer consumes more of the
commodity.
When TU is maximum, MU is Zero.
After that, TU starts declining and MU
becomes negative.
Rare and curious things
Intoxicants
Good books and poetry
Consumption of public goods
First time consumption of a commodity
The law is used to the consumer to maximise
the utility out of his expenditure
The idea of consumer surplus is also based on
this law
The law of demand is based on this law
The law tells us the different between value in
use and value in exchange
The law explains why, with increases in its
supply the value of a commodity must fall.
Every consumer aims at maximum possible
satisfaction at the time of consumption. He
choose the most useful things. He substitutes
the more useful things the maximisation of
satisfaction is explained by the law of equi-
marginal utility.
"A person can get maximum utility with his
given income when it is spent on different
commodities in such a way that the marginal
utility of money spent on each item is equal".

It is clear that consumer can get maximum


utility from the expenditure of his limited
income. He should purchase such amount of
each commodity that the last unit of money
spend on each item provides same marginal
utility.
There is no change in the prices of the goods.
The income of consumer is fixed.
The marginal utility of money is constant.
Consumer has perfect knowledge of utility
obtained from goods.
Consumer is normal person so he tries to seek
maximum satisfaction.
The utility is measurable in cardinal terms.
Consumer has many wants.
The goods have substitutes.
Money (Units) MU of apples MU of bananas
1 10 8
2 9 7
3 8 6
4 7 5
5 6 4
6 5 3
$1 on apples and $5 on bananas. The total utility he can get
is:
[(10) + (8+7+6+5+4)] = 40.
$2 on apples and $4 on bananas. The total utility he can get
is:
[(10+9) + (8+7+6+5)] = 45.
$3 on apples and $3 on bananas. The total utility he can get
is:
[(10+9+8) + (8+7+6)] = 48.
$4 on apples and $2 on bananas. This way the total utility is:
[(10+9+8+7) + (8+7)] = 49.
$5 on apples and $1 on bananas. The total utility he can get
is:
[(10+9+8+7+6) + (8)] = 48.
Effect of fashion and custom
Use of indivisible goods
Utility cannot be measured
Non availability of goods
Lethargy of the consumers
Durable goods
Constant income and prices
Careful calculation
Ignorance
Free goods
1 The law of equi marginal utility is helpful in the field of
production. The producer has limited resources. He uses
limited resources to purchase production factors. He tries to
equalize marginal utility of all factors. He wishes to get
maximum output and profit.
2. National income is distributed among factors of
production according to this law. An entrepreneur can pay
factors of production equal to marginal product measured
in money terms. He will substitute one factor for another
until marginal productivity of all factors is equal to prices of
their services.
3. The law is used in the field of exchange. The people like to
exchange a commodity having low utility with a commodity
having high utility. There is maximum benefit from
exchange of commodities. The law is helpful in exchange of
wealth, trade, import and export.
4 The law is applicable in consumption. A rational
consumer tries to get maximum satisfaction when he
spends his limited resources on various things. He tries
to equalize weighted marginal utility of all the things.
5. The law is applicable in public finance. The
government can spend its revenue to get maximum
social advantage. The marginal utility of each dollar
spent in one sector must be equal to marginal utility
derived from all other sectors.
6. The law is useful for workers in allocating the time
between work and rest. They can compare the
marginal utility of work and the marginal utility of
rest. They can decide working hours and rest hours.
7. The law holds well in case of saving and
spending. The consumer can make choice between
present wants and future wants. He can feel that a
dollar saved has greater utility than a dollar spent,
he can save more and spend less. He will
substitute saving and spending till marginal utility
of a dollar spent and a dollar saved are equal.
8. The law is helpful in prices. Due to scarcity of
commodity its prices go up. The law tells us to use
substitute commodity, which is less scarce. The
result is that the price of commodity comes down.
Thanks

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