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Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes

Karnataka Class 12 Commerce Economics Concepts Of Utility : Cakart team members provides here Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes and other Karnataka Class 12 Commerce Economics Concept related notes in pdf format. We provides you direct link for downloading Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes in pdf format. Download Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes and read well.

Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes

Karnataka Class 12 Commerce Economics Concepts Of Utility : Utility is in one sense extremely simple, and in another tremendously complex. The basic idea of some things being better than other things is something we intuit, probably from birth, wired into our brains by evolution: we like eating sugar, we don’t like getting burned. But actually formalizing utility into something that can be applied in economic theory to understand human behavior is fiendishly complicated

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Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes

Karnataka Class 12 Commerce Economics Concepts Of Utility : In general what we do is abstract away from all this, and simply take it as given that we can assign some number to each thing (each good we might buy, or each event that might happen to us), where higher numbers are better than lower numbers, and call that the utility. Then, we assume that people seek to maximize that utility, choosing things that will lead them to higher numbers.

Economists generally distinguish between two concepts of utility, a “weak” or ordinal utility which only says whether A is better than B, but cannot say how much, and a “strong” or cardinal utility that actually says that A is some number X units of utility better than B.

Cardinal utility is much easier to work with, especially when dealing with matters of risk; but it is also much harder to measure in the real world. We can relatively straightforwardly determine whether people like A versus B by giving them the choice and seeing which one they go for; but in order to determine how much more, we need to devise far more complicated and clever experiments. Worse, it’s actually quite common for people to behave in experiments in such a way that they can’t possibly be acting by a coherent utility function, but instead must be using some sort of heuristics to make their judgments; the field of behavioral and cognitive economics arose from such findings.

Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes

Karnataka Class 12 Commerce Economics Concepts Of Utility : Although the concept of ‘taste’ and ‘satisfaction’ are familiar for all of us, it is much more difficult to express these concepts in concrete terms. For example, suppose you have just eaten an ice-cream and a chocolate.

Economics

Can you tell how much are you satisfied from each of these items? Probably you can tell which item you liked more. But, it is very difficult to express “how much” you liked one over the other. It is evident, that we need a more quantitative measure of satisfaction. Due to this reason, economists developed the concept of utility.

Meaning of Utility:

Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or expected, derived from the consumption of a commodity. Utility differs from person- to-person, place-to-place and time-to-time. In the words of Prof. Hobson, “Utility is the ability of a good to satisfy a want”.

In short, when a commodity is capable of satisfying human wants, we can conclude that the commodity has utility.

How to Measure Utility?

After understanding the meaning of utility, the next big question is: How to measure utility? According to classical economists, utility can be measured, in the same way, as weight or height is measured. For this, economists assumed that utility can be measured in cardinal (numerical) terms. By using cardinal measure of utility, it is possible to numerically estimate utility, which a person derives from consumption of goods and services. But, there was no standard unit for measuring utility. So, the economists derived an imaginary measure, known as ‘Util’.

Utils are imaginary and psychological units which are used to measure satisfaction (utility) obtained from consumption of a certain quantity of a commodity.

Example – Measurement of satisfaction in utils:

Suppose you have just eaten an ice-cream and a chocolate. You agree to assign 20 utils as utility derived from the ice-cream. Now the question is: how many utils be assigned to the chocolate? If you liked the chocolate less, then you may assign utils less than 20.

However, if you liked it more, you would give it a number greater than 20. Suppose, you assign 10 utils to the chocolate, then it can be concluded that you liked the ice-cream twice as much as you liked the chocolate.

One more way to measure utility:

Utils cannot be taken as a standard unit for measurement as it will vary from individual to individual. Hence, several economists including Marshall, suggested the measurement of utility in monetary terms. It means, utility can be measured in terms of money or price, which the consumer is willing to pay.

In the above example, suppose 1 util is assumed to be equal to Rs. 1. Now, an ice-­cream will yield utility worth Rs. 20 (as 1 util = Rs. 1) and chocolate will give utility of Rs. 10. This utility of Rs. 20 from the ice-cream or f I0 from the chocolate is termed as value of utility in terms of money.

The advantage of using monetary values instead of utils is that it allows easy comparison between utility and price paid, since both are in the same units.

It must be noted that it is impossible to measure satisfaction of a person as it is inherent to the individual and differs greatly from person-to-person. Still, the concept of utility is very useful in explaining and understanding the behaviour of consumer.

Total Utility (TU):

Total utility refers to the total satisfaction obtained from the consumption of all possible units of a commodity. It measures the total satisfaction obtained from consumption of all the units of that good. For example, if the 1st ice-cream gives you a satisfaction of 20 utils and 2nd one gives 16 utils, then TU from 2 ice-creams is 20 + 16 = 36 utils. If the 3rd ice-cream generates satisfaction of 10 utils, then TU from 3 ice-creams will be 20+ 16 + 10 = 46 utils.

TU can be calculated as:

TUn = U1 + U2 + U3 +……………………. + Un

Where:

TUn = Total utility from n units of a given commodity

U1, U2, U3,……………. Un = Utility from the 1st, 2nd, 3rd nth unit

n = Number of units consumed

Marginal Utility (MU):

Marginal utility is the additional utility derived from the consumption of one more unit of the given commodity. It is the utility derived from the last unit of a commodity purchased. As per given example, when 3rd ice-cream is consumed, TU increases from 36 utils to 46 utils. The additional 10 utils from the 3rd ice-cream is the MU.

In the words of Chapman, “Marginal utility is addition made to total utility by consuming one more unit of a commodity”.

MU can be calculated as: MUn = TUn – TUn-1

Where: MUn = Marginal utility from nth unit; TUn = Total utility from n units;

TUn-1 = Total utility from n – 1 units; n = Number of units of consumption

MU of 3rd ice-cream will be: MU3 = TU3 – TU2 = 46 – 36 = 10 utils One More way to Calculate MU

MU is the change in TU when one more unit is consumed. However, when change in units consumed is more than one, then MU can also be calculated as:

ATU

MU = Change in Total Utility/ Change in number of units = ∆TU/∆Q

Total Utility is Summation of Marginal Utilities:

Total utility can also be calculated as the sum of marginal utilities from all units, i.e.

TUn= MU1 + MU2 + MU3 +……………………… + MUn or simply,

TU = ∑MU

The concepts of TU and MU can be better understood from the following schedule and diagram:

Table 2.1: TU and MU

Ice-creams Consumed Marginal Utility (MU) Total Utility (TU)
1 20 20
2 16 36
3 10 46
4 4 50
5 0 50
6 -6 44

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In Fig. 2.1, units of ice-cream, are shown along the X-axis and TU and MU are measured along the Y-axis. MU is positive and TU is increasing till the 4th ice-cream. After consuming the 5th ice-cream, MU is zero and TU is maximum.

This point is known as the point of satiety or the stage of maximum satisfaction. After consuming the 6th ice-cream, MU is negative (known as disutility) and total utility starts diminishing. Disutility is the opposite of utility. It refers to loss of satisfaction due to consumption of too much of a thing.

Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes

Important Note – Preparing for XI & XII Commerce?
CAKART provides Indias top faculty each subject video classes and lectures – online & in Pen Drive/ DVD – at very cost effective rates. Get video classes from CAKART.in. Quality is much better than local tuition, so results are much better.
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