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  Utility Analysis Introduction: A consumer demands a good or a service. He demands a good because it gives himutility. Wants – satisfying capacity of a good is called utility. Meaning of Utility: The term utility in economics is used to denote that quality in a commodity or service by virtueof which our wants are satisfied. In other words, want – satisfying power of a good is calledutility. Definitions: According to Jevons, “Utility refers to abstract quality whereby an object servesour purpose.In the words of Hibdon, “Utility is the quality of good to satisfy a want.”According to Mrs. Robinson, “Utility is the quality in commodities that makesindividuals wants to buy them”. Utility differs from usefulness A commodity may satisfy a human want, but may not be useful. For example-opium and poison, but because they satisfy human wants and some people are ready to pay for them, means theyhave utility for them. So a thing may be good or bad, but if it satisfies a human want, means it possesses utility. Utility is not synonymous with pleasure A good, which posses utility, may not give pleasure when consumed e.g. , quinine, bit in spite of its bitter taste quinine is purchased and consumed, for it does fulfill a need. Hence utility is notthe same thing a pleasure. Forms of utility ã Forms utility. By changing the form of an article; we can give it greater utility, e.g. ; thetransformation of a log of wood into a piece of furniture. ã Place utility. Utility can also be increase by transporting a good from one place toanother.When timber is brought to the market, it comes to have much greater utility than it had inforest. ã Time utility . By storing a commodity and selling it at a time of scarcity, we can give itgreater utility.  ã Possession utility - The utility, which is rested with the right and authorized Features: Utility is Subjective: as it deals with the mental satisfaction of a man. A thing may have differentutility to different persons. E.g. Liquor has utility for drunkard but for person who is teetotaller,it has no utility.Utility is Relative: As a utility of a commodity never remains the same. It varies withtime and place. E.g. Cooler has utility in summer not during winter season. Utility is not essentially Useful: A commodity having utility need not be useful. E.g. Liquor andcigarette are not useful, but if these things satisfy the want of addict then they have utility for him.Utility is independent of Morality: It has nothing to do with morality. Use of opium liquor may not be proper from moral point of view, but as these intoxicants satisfy wants of the opium – eaters,drunkards, they have utility. Concepts of Utility:Initial Utility: The utility derived from the first unit of commodity is called initial utility. It is obtained from theconsumption of the first unit of a commodity. It is always positive. Total Utility :The aggregate of utility obtained from the consumption of different units of a commodity, iscalled Total utility.Tux = f (Q x)Tux = total utility of x is a function (f) of quantity of commodity x. Marginal utility Marginal utility can be defined as the change in the total utility resulting froma one-unit change in the consumption of a commodity per unit of time.Marginal utility is the increase in total utility resulting from the consumptionof the marginal unit. The following formula may be used to measure it.Marginal utility=    Marginal Utility of Money It is said that there can be a limit to the purchase of a commodity, but thereis no such limit to the acquiring of money. Money is a general purchasingpower. It enables the purchaser to buy anything he likes. That is why it issaid one can never reach a stage where money ceases to be desired. Inother words, more money a person has more he desires to obtain it. Marginal Utility and Price Marginal utility and price are inter-related. The two coincide, or pricemeasures marginal utility. The consumer stops where the price and themarginal utility are equal. All units of the commodity being interchangeable,what is paid for the marginal unit is paid for every other unit. Therefore wecan say that marginal utility determines price. It is marginal utility and nottotal utility that determines price, otherwise the price of water should havebeen high, and that of gold low.Really, marginal does not determine price; it simply indicates it. Thedetermining factors are demand and supply. If the price changes, marginalutility will change too. Price and marginal utility thus move together up anddown. Marginal Utility and supply Marginal utility is a function of supply, i.e., it varies with supply. In the caseof a free good, where the supply is unlimited, the marginal utility is zero.Only in the case of scare goods is the marginal utility positive. It increases asthe supply is contracts and decreases as it expands. It comes down to zerowhen the supply is super-abundant. Hence, marginal utility varies inverselywith supply, i.e., the greater the supply the less the marginal utility, and viceversa. Marginal utilities of related goods There are two main types of relationship between goods: (a) They may besubstitutes; or (b) they may be complementary. The substitutes are capable of satisfying the same want, e.g., tea andcoffee, air transport, rail transport and road transport. If they are perfectsubstitutes, they may be treated as one commodity for all practical  purposes. But most goods are only imperfect substitutes. In the case of suchgoods, other things being equal, the marginal utility of any such gooddecreases as the quantity of the substitute goods with the consumerincreases. Complementary goods are such goods which are wanted together for thesatisfaction of a want, e.g., paper, pen and ink for writing. In such cases,other things remaining the same, marginal utility increases as the quantitiesof the complementary goods with the consumer increases. If, for instance, aconsumer acquires more paper, the marginal utility of the bottle of ink goesup. Practical Importance of the Law of Diminishing MarginalUtility Taxation . The law of diminishing marginal utility has great practicalimportance. We have seen that the law of diminishing marginal utility appliesto money too. This law forms the basis of the theory and practice of taxation.Richer a person the higher is the rate of the tax he has to pay since to himthe marginal utility of money is less. Price Determination . The law explains why, with increase in its supply, thevalue of a commodity must fall. It thus forms a basis of the theory of value.As such its practical importance both to the general consumer and thebusiness can hardly be exaggerated. Household Expenditure.  The law of diminishing marginal utility governsour daily expenditure. Since we know that a larger purchase will mean lowermarginal utility, we restrict our purchase of a particular commodity, becausewe cannot afford to waste our limited resources. We stop further purchasesat a point where marginal utility equals price. Downward Sloping Demand Curve. It is this law which tells us whydemand curves slope downwards. Value-in use and Value- in –Exchange. It also explains the divergencebetween value-in-use and value –in-exchange. Air has great utility (value-in-use) but little value-in-exchange, because it has no marginal utility. Socialism . The socialists take stand on this law when they advocate the re-distribution of wealth in favour of the poor. The marginal utility to the rich of the wealth, that they might lose, is not so great as the marginal utility of thewealth which is transferred to the poor.
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