CONCEPT OF UTILITY, ISOQUANT CURVE,INDIFFERENCE CURVE
1.THE CONCEPT OF UTILITY
The
satisfaction of the people derived from their consumption activities. utility refers to the rate of remove of
discomfort or satisfaction that an individual receives.
Eg:1) If you are very hungry this cause discomfort for you to
remove this discomfort you buy a food this is an utility
Assumptions:
Tastes and preferences are fixed and given and play a larger
role in decision making
People allocate their income to maximize their satisfaction
or total utility.
Eg:2) If
you purchased a sweater you find more utility in Kashmir than in Karnataka because
that commodity satisfies more needs in that place.
2.DIFFERENCE BETWEEN CARDINAL UTILITY AND ORDINAL UTILITYCARDINAL UTILITY
Helps the
customers to measure the preferences of goods
1.The
customers satisfaction can be measured using cardinal utility.
2.the
‘util’ is used as measuring unit of cardinal utility
3.1 util=
1 unit of money
4.For
example Ferrari car gives 5000units of utility and BMW gives 3000 units of
utility(marginal cost=marginal utility)
ORDINAL
UTILITY
Helps the
customers to select the product through ranking system.
1.when we
are using ranking we are using ordinal utility
2.in
ordinal utility, the consumers only ranks choices in terms of preferences but
we do not give exact numerical figures for utility.
3.For
example we prefer BMW car to Ferrari car, but we don’t say how much in
measures.
3.PRINCIPLE OF DIMINISHING MARGINAL UTILITY
The Law Of Diminishing Marginal Utility states that with the
increase in the consumption of every unit there is decline marginal utility
from each additional unit.
In economics point of view utility means satisfaction or
happiness.
Ex:1) If you are so much hungry and decided to eat pizza. One
person can eat 2 slices of pizza costs around 50rs, as you are much hungry you decided
to buy 6 slices.
Eating 2 slices your utility is high and more satisfied as
you are hungrier, by eating 4th slice of pizza your utility decrease
as you are not much hungry as starting stage. The sixth slice, as before, holds
even less utility as the individual is now not hungry anymore.
Ex:2) If you purchase a clothes for party, For the first time
use you got 10 utility, for the second time it may not give the same level of
satisfaction it decreases to 7 utility and the third time it went to 5 utility.
But it is based on tastes and preferences of the customer,
And it’s differ from the individuals.
4.ISOQUANT CURVE AND MAP
The isoquant curve helps to show that with increase in
combined inputs there is no change in output.
Therefore, an isoquant represents a constant
quantity of output.
Q= f (L, K)
§ Only two factors of production Viz.
Labour and capital are taken into the consideration.
§ These factors can be substituted for
each other.
§ The factors of production can be divided
into small parts.
§ It is assumed that technology remains
constant.
§ The shape of the Iso-quant depends on
the level of substitutability between the factors of production.
Example:
Combination
|
Labour (unit)
|
Capital (Unit)
|
Output (Number)
|
A
|
1
|
10
|
100
|
B
|
2
|
9
|
100
|
C
|
3
|
8
|
100
|
D
|
4
|
7
|
100
|
ISOQUANT MAP
Isoquant map is used to show
different isoquant curves in different combination of factors
Thus, higher the higher the isoquant
curve results the higher level of output.
5.INDIFFERENCE CURVE
This curve
used to show the combination of two goods gives the equal amount of
satisfaction and utility to the consumer
Example:
The
consumer wants to buy 10 apples then he substitutes oranges in the place of
apples which gives same level of satisfaction to him.
From above curve in point A and point B the
consumer face same level of utility or satisfaction
Example:
If you
have 300rs but you want to travel in cab so, for same extent you go by cab and
to reach the distance you travel in bus.by this the consumer satisfies by
utilising two factors.
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