managerial econimics 22

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MANAGERIALANAGERIAL

ECONOMICSCONOMICS

:resented by:resented by

( / / )shwani Kumar 10 PMB 019( / / )shwani Kumar 10 PMB 019.vnish Kr Chauhan.vnish Kr Chauhan

( / / )0 PMB 021/ / )0 PMB 021



Ø Marginal Utility

Ø Indifference CurveØ Budget Line

Ø Consumer Equilibrium



, ‘ ’In economics the term utility is used to denote that quality of a commodity or service by virtue

.of which our wants are satisfied

,In other words“ a n t sa t is fy in g p o w e r o f a g oo d is c a l l e d

. ”t i l i t y

This is assumed to be measured in terms of, , , , .cardinal numbers such as 1 2 3 4 etc These numbers are called utils or units of utility

HE CONCEPT OF UTILITY HE CONCEPT OF UTILITY



t is the additional utility on account of the onsumption of an additional unit of a

.ommodity

o r ex am p l e If a 10 units of a commodity yield,satisfaction of 100 utils and 11 units of a commodity

,yield satisfaction of 105 utils then the additional utility on account of consumption of 11th unit of the

:commodity is

- = .05 100 5 utils.This is called marginal utility

HE CONCEPT OF HE CONCEPT OF ARGINAL UTILITYARGINAL UTILITY



EASUREMENT OF MARGINAL EASUREMENT OF MARGINAL UTILITTILIT

( )he Marginal Utility MU is measured:s under

=MU TUn – TU -n 1

Referring to the above example=MU TU11 – TU10

= – = .105 100 5 utils



ILLUSTRATILLUSTRATIONN

.able 1 Gives an illustration on the estimation of T U and .U

onsumption of

ommodity X[ ]nits

TUX

MUX12345

100190270340400

[00 TU - TU0= -00 0

= ]00[0 TU - TU1= - =90 100

]0[0 TU - TU2= - =70 190

]0 [0 TU - TU3= - =40 270

]0[0 TU - TU4= - =00 340

]0

:h e ta b le s ho w s

. =U TU n – TU -1

. =U ∑ = [ + + + + ] = .U 100 90 80 70 60 400



IAGRAMATIC PRESENTATIONIAGRAMATIC PRESENTATION

onsumption of X( )nits



NDIFFERENCE NDIFFERENCE URVE URVE

APPROACHPPROACH



RDINAL RDINALUTILITYTILITY

, ,As Utility is subjective its measurement is not.possible in real life So there is an alternative

approach developed by economists known as r d i n a l

t i l i t y t h e o r y , which deals with the consumers

behavior under the assumption that utility from different units of good or between different goods

need only be a n k a b l e .and not measurable

:For example If a consumer gets more utility from

bundle A

than from bundle B

,it means that consumer

will rank bundle A above bundle B .



. :a t i o n a l i t y A consumer aims to maximize his( )utility subject to income and prices under condition of certainty

.2. :o m p l e t e O r d e r i n g All possible combination of

,goods can be ordered into preferred indifferent or inferior combinations when compared to a given

combination of the good.4. :o n s i s t e n c y This Condition requires that if a

, ,consumer prefers bundle A to bundle B he does not

,at the same time prefers bundle B to Bundle to A.6. :r a n s i t i v i t y If a consumer prefers bundle A to

,bundle B and bundle B to C he prefers bundle A to bundle C

.8

. - :o n s a t i e t y A bigger bundle is preferred to a smaller bundle

EATURES EATURES



NDIFFERENCE CURVE NDIFFERENCE CURVE

A curve that shows different combination of two goods yielding the same level of utility to consumer is known

( – ).as Indifference Curve Equal utility Curve

,Since all points on the curve yield equal satisfaction,the consumer likes equally all the combinations and is

, .therefore indifferent between these combinations

COMBINATION Unit of Good X Unit of Good Y

AB

C

D

E

12

3

4

5

3024

19

15

12

Indifference

Schedule



U N

I T S

O F

Y

UNITS OF X

An Indifference Curve

Indifference Curve

N INDIFFERENCE CURVE N INDIFFERENCE CURVE



UDGET LINE UDGET LINE

R R-SO-SO

XPENDITURE XPENDITURE

LINEINE



A consumer's budget line characterizes on a graph the maximum amounts of goods that the consumer can.afford

UDGET LINE OR UDGET LINE OR-SO EXPENDITURE LINE SO EXPENDITURE LINE

( ) ( )a p r ef e re n ce f o r th a t g oo d a nd ii

.u r c h a si ng p ow er t o b u y t h e g o o d His preference,pattern is represented by a set of indifference curves while his purchasing power depends upon his money

.income and market prices of the goods

=Qx .

P +Q y . P y

where E = ;Expenditure on goods X and Y

Q x and Q =Quantity of Good X and Y

;respectively and=



udget Line

t of Good X

nit of Good Y

ffordable ffordable

ot Affordable ot Affordable

HE BUDGET HE BUDGETLINEINE

/Py

/Py



:Let a consumer has= . ,Rs 2000

P = .s 50 and

Py = . .s 40

The maximum amount of X which he can be found fromhis

:budget equation = (000 50 Qx) + ( )0 0 or Qx =40

Similarly we find the maximum amount of Q

y=50

So the combination ( , )0 0 and ( , )50 are possible

consumption bundles within the budgeted amount of.many By joining these two points in graph we get the

.budget line AB

ILLUSTRATIONLLUSTRATION



’ONSUMER S ONSUMER SEQUILIBRIUMQUILIBRIUM



’ONSUMER S EQUILIBRIUM ONSUMER S EQUILIBRIUM

,In consumer equilibrium you allocate income between the purchase of different goods in such a way that you cannot

, ,increase your level of utility that is you have achieved.utility maximization

:etermination of consumer equilibrium.If there is only two good A and B The consumer knows the

prices A and B and has a fixed budget that can be used to.purchase quantities of A and B The consumer will purchase

quantities of A and B so as to completely exhaust the

.budget for such purchases The actual quantities purchased of each good are determined by the condition for consumer, :equilibrium which is

a r g i n a l U t i l i t y O f A M a r g i n a l a r g i n a l U t i l i t y O f A M a r g i n a l

t i l i t y O f B t i l i t y O f B

r i c e O f A r i c e O f A



*

*

C

E

D

G

F

B

A

I4

I3I2

I1

’ONSUMER S ONSUMER SEQUILIBRIUMQUILIBRIUM

U

N I T S

O F

Y

UNITS OF X



nits ofA

U of A /U Price of A nits of B U of B /U Price ofB

1

2

3

4

24

18

12

6

12

9

6

3

1

2

3

4

9

8

5

1

9

8

5

1

ILLUSTRATION

= . ,rice of A Rs 2= . ,rice of B Rs 1

= .udget Rs 5



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managerial econimics 22

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