Utility Analysis

Introduction Utility refers to the want satisfying power of a commodity. The main concepts of utility are marginal utility and total utility. Consumer’s equilibrium refers to the level of consumption where the consumer gets maximum level of satisfaction from consumption of the good with his given income and the price of the good. Two alternative approaches of consumer’s equilibrium are: Utility Approach and Indifference Curve Approach. The various assumptions of utility approach are: consumer is rational and aims at maximising utility, utility is equal to the amount of money paid for the commodity, law of diminishing marginal utility operates, etc. Condition of Consumer’s Equilibrium under utility approach in One Commodity Case (say X) is: Marginal Utility of good X is equal to its price. Condition of Consumer’s Equilibrium in Two Commodity Case (say X and Y) is: Marginal Utility of good X divided by price of good X is equal to Marginal Utility of good Y divided by price of good Y which is equal to marginal utility of rupee spent on a good. This is also called the law of equi-marginal utility. The law of equi-marginal utility states that a consumer maximizing his total utility should allocate his income among various goods in such a way that the marginal utility of the last rupee spent on each good is equal. The main drawback or criticism of utility analysis is the assumption of cardinal utility. Utility can never be measured numerically because satisfaction is a mental phenomenon.

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