3. Theory of consumption.pptx - Theory of Consump tion...

Utility, Indifference curve, Budget line
Theory of Consump
tion
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•
Michael Parker
•
H.L. Ahuja
• Mohammad Saiful Islam

Utility
Utility refers to the satisfaction. In economics, it is a r
epresentation of preferences over some set of goods
and services. Given an income and the market prices
of various goods, a rational consumer wants to obtain
highest possible utility or satisfaction. In order to do s
o, consumer must be able to compare utility of variou
s baskets of goods, which he can buy with his incom
e.
Two approaches have been identified to the problem
of comparison of utilities-
1. The cardinalist Approach
2. The ordinalist Approach.

Cardinal Utility Analysis

Law of Diminishing Marginal Utility
Assumptions
1. Cardinal measurement of utility.
2. The hypothesis of independent utilities
3. Constancy of the marginal utility of money
This law states that, the amount of extra or marginal utility
declines as a person consumes more and more of a
good.
Utility tends to increase as we consume more of a good.
However, according to the law of diminishing MU, as we
consume more and more our total utility will increase but at
a decreasing rate.

Law of Diminishing Marginal Utility