Human Wants Are Unlimited 54m45

Nature of human wants 1. Human wants are unlimited: Man’s mind is so made that he never completely satisfied and hence there is no end to human wants. One want is satisfied another want will crop up to take its place and thus it is never ending cycle of want. 2. Any particular want is satiable: Though the wants are unlimited, but it is possible to satisfy a particular want, provided has the means (resource). 3. Wants are complementary: It is a common experience that we want things in groups. A single article out of group can not satisfy human wants by it self. It needs other things to complete its use e.g. a motor-car needs petrol and mobile oil it starts working. Thus the relationship between motor-car and petrol is complementary. 4. Wants are competitive: Some wants competes to other. We all have a limited amount of money at our disposal; therefore we must choose some things and reject the other. E.g. sugar and jaggery, tea and coffee. 5. Some Wants are both complimentary and competitive: When use of machinery is done the use of labour needs to be reduced. This indicates competitive nature. But to run the machinery the labour is also required and as such it indicates complimentary relationship. 6. Wants are alternative: There are several ways of satisfying a particular want. If we feel thirsty, we can have water, lassi, in summer while coffee, tea in winter. The final choice depends upon availability of money and the relative prices. 7. Wants vary with time place and person: Wants are not always the same. It varies with individual to individual. People want different things at different times and in different places. 8. Wants vary in Urgency and Intensity: All wants are not equally urgent and in tense. Some wants are urgent while some are less urgent. 9. Wants multiply with civilization: With the advancement the wants multiply. Therefore the wants of people living in urban area are more than the villagers. With civilization the demand for radio, T.V, motor-car etc, are increasing. 10. Wants are recur: Some wants are recurring in nature, e.g. food we require again and again. 11. Wants change into habits: If a particular want is regularly satisfied a person becomes used to it and it grows into habit e.g. smoking of cigarate and use of drugs. 12. Wants are influenced by income, salesmanship and ment: It income is higher more wants can be satisfied. Many things we buy of particular brands due to salesmanship or ment. 13. Wants are the result of custom or convention: As a part of custom and convention we buy many thins. Really they are not required but unlikely we have to purchase it e.g. expenses on social ceremonies. 14. Present wants are more important then future wants: Future is uncertain and hence man is more concerned with the satisfaction of the present wants rather than future wants.

UTILITY ANALYSIS Introduction: A consumer demands a good or a service. He demands a good because it gives him utility. 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 virtue of which our wants are satisfied. In other words, want – satisfying power of a good is called utility. Definitions:  According to Jevons, “Utility refers to abstract quality whereby an object serves our 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 makes individuals wants to buy them”. Features: 1. Utility is Subjective: as it deals with the mental satisfaction of a man. A thing may have different utility to different persons. E.g. Liquor has utility for drunkard but for person who is teetotaller, it has no utility. 2. Utility is Relative: As a utility of a commodity never remains the same. It varies with time and place. E.g. Cooler has utility in summer not during winter season. 3. Utility is not essentially Useful: A commodity having utility need not be useful. E.g. Liquor and cigarette are not useful, but if these things satisfy the want of addict then they have utility for him. 4. 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. Cardinal and Ordinal Approach Cardinal Approach (measurable) It is called as utility approach. It involves the use of measurable utility like weight, height or temperature to study the consumer behaviour. According to cardinal utility concept, it is possible to measure the utility in cardinal numbers such as 1,2,3,4… etc. Cardinal numbers refers to those numbers which can be added, subtracted etc. marshall is trhe chief exponent of this approach

Ordinal Approach Modern economics like J R Hicks and others ed this approach. They said the theory of consumer behaviour can be explained without the use of concept of measurability of utility. According to ordinal utility concept, utility cannot be measured but it can only be compared. Consumer is suppose to rank order utility obtained from the consumption of different commodities as I,II,III etc.

Concepts of Utility: 1) Initial Utility: The utility derived from the first unit of commodity is called initial utility. It is obtained from the consumption of the first unit of a commodity. It is always positive. 2) Total Utility: The aggregate of utility obtained from the consumption of different units of a commodity, is called Total utility. Tux = f (Qx) Tux = total utility of x is a function (f) of quantity of commodity x.

3) Marginal Utility: The change that takes place in the total utility by the consumption of an additional unit of commodity is called marginal utility. MUnth = Tn – Tn-1 or MU = change TU/ change Q MUnth = Marginal utility of nth unit. Tn = total utility of n units. Tn-1 = total utility of n-1 units Change TU = change in total utility Change Q = change in the quantity of commodity Marginal utility can be: a) Positive Marginal Utility: If by consuming additional units of commodity, total utility goes on increasing, then marginal utility of these units will be positive. b) Zero Marginal Utility: If the consumption of additional unit of commodity causes no change in the total utility, it means the marginal utility of additional unit is zero. c) Negative Marginal Utility: If the consumption of an additional unit of a commodity causes fall in total utility, it means the marginal utility is negative.

Relation between Total Utility and Marginal Utility: Total utility is the summation of the marginal utilities of different units of a commodity. TU =

MU

Total utility is summation of Marginal utility Table: Quantity 0 1 2 3 4 5 6

Total Utility 0 8 14 18 20 20 18

Marginal Utility 8–0=8 14 – 8 = 6 18 – 14 = 4 20 – 18 = 2 20 – 20 = 0 18 – 20 = -2

Description Initial Utility Positive Utility

Zero Utility Negative Utility

Table shows that: a) As more and more units of commodity is consumed, the marginal utility derived from each successive unit goes on diminishing. But the total utility increases up to a limit. b) Marginal utility of the first four units being positive, the total utility goes on increasing. Thus as long as the marginal utility of the commodity remains positive, total utility goes on increasing. c) Marginal utility of the fifth unit is zero. In this situation total utility (20) will be maximum. This situation also represents point of saturation. d) Marginal utility of the sixth unit is negative. As a result of it, total utility of six units of the commodity falls from 20 to 18 units.

Can utility be measured? It can be attempted to measure by two methods: 1. Measurement in of Money: In order to measure the utility in of money, it is estimated what amount of money a man is willing to pay for a thing. 2. Measurement in of Units: Prof. Fisher has used the term, “Util”, as a unit for the measurement of utility. In this method utility is expressed in Utils. Criticism of the Measurement of Utility:

It has been criticized by Prof. Samuelson as the value of money keeps changing. Therefore utility cannot be measured definitely in the of money. Laws of Utility Analysis: Utility has two main laws:

Law of Diminishing Marginal Utility

Law of Equi – Marginal Utility

LAW OF DIMINISHING MARGINAL UTILITY Law of Diminishing Marginal Utility is the foundation stone of utility analysis. All of us experience this law in our daily life. If you buy pen at any given time, then as the number with you is increasing, the marginal utility from each successive pen will go on decreasing. It is the reality of man’s life which is referred to in economics as Law of Diminishing Marginal Utility. Definitions:  According to Marshall, “The additional benefit which a person derives from a given stock of a thing diminishes with every increase in the stock that he already has.” 

According to Chapman, “The more we have of a thing, the less we want additional increments of it or more we want not to have additional increments of it.”

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According to Samuelson, “As the amount consumed of good increases, the marginal utility of a good tends to decrease.”

It is clear from the above definitions that at a given time when we go on consuming additional units of a commodity, the marginal utility from each successive unit of that commodity, other things being equal, goes on diminishing in relation to the preceding unit. It is this diminishing tendency of the marginal utility that has been enshrined in the law of diminishing marginal utility. Assumptions: 1. Utility can be measured in the Cardinal number system. 2. Marginal Utility of money remains constant. 3. Marginal Utility of every commodity is independent. 4. Every unit of the commodity being used is of same quality and size. 5. There is a continuous consumption of commodity 6. Suitable quantity of a commodity is consumed. 7. There is no change in the income of consumer. 8. There is no change in the price of commodity and its substitutes. 9. There is no change in the tastes, character, fashion, and habits of consumer. The law can be explained with the help of following table

Quantity 1 2 3 4 5 6

Marginal Utility 8 6 4 2 0 -2

Total Utility 8 14 18 20 20 18

Exceptions: Law does not apply under the following situations: 1. Curious and rare things Law does not apply to rare or curious things like persons who collect old and rare coins, postage stamps as increasing marginal utility as the stock of these rare articles goes on increasing. They are always keen to obtain more and more units of such things. 2. Misers It seems law does not apply to misers who are out to acquire more and more of wealth. Their desire for money seems to be insatiable. 3. Good book or poem It is said that by reading a good book or listening to a melodious song and a beautiful poem again and again one gets more utility than before. 4. Drunkards It can be said that when a drunkard takes a liquor and intoxicant than as he takes more and more pegs of liquor his desire to have more of it goes on increasing. 5. Initial units When the initial units of a commodity in used in less then appropriate quantity, then the marginal utility from the additional units goes on increasing. Importance of the law 1. Basis of the law of consumption Law of diminishing marginal utility is the basis of all law of consumption. There are three laws of consumption: a) Law of equi marginal utility According to this law a consumer does not spend all his income on one commodity. In order to get the maximum satisfaction the consumers spends his income in such a way that the last unit of money spent on different commodities yield equal marginal utility. b) Law of demand According to this law a consumer will demand more units of a commodity at low price. c) Concept of consumer surplus According to this concept unit prior to the marginal unity yield more utility. This surplus utility is called consumer surplus. 2. Variety in production and consumption It is because of the operation of the law of diminishing marginal utility that variety in production and consumption is found. Continuous

consumption of one commodity will yield less and less marginal utility to the consumers. So every prudent consumer stops the consumption of that good after a particular limit and shift to other commodity. 3. Difference between value in use and value in exchange According to Adam Smith goods having more value in use command low price and those having more value in exchange command high price. It can be explained on the basis of diminishing marginal utility as there is abundant supply of water air etc and the same can be used in large quantity, consequently there marginal utility falls rapidly and so is the price. Thus goods having more value in use have less marginal utility. 4. Price determination Price of every commodity is determined by its demand and supply. Demand for a commodity depends upon its marginal utility. The consumer buys more units only when the price per unit falls. 5. Basis of progressive taxation Progressive taxation system refers to that system of taxation under which rate of taxation increases as the income of person increases. It is so because with increase in income marginal utility of money goes on diminishing. 6. Advantage to the consumer According to this law, in order to get maximum satisfaction from the consumption of a good a consumer should buy only that many units of it whose marginal utility is equal to its price. 7. Basis of redistribution According to this law the fundamental reason of redistribution of income is that marginal utility of money to the rich is less then to poor. So it wealth is redistributed in favor of poor, total welfare of society would increase.

LAW OF EQUI – MARGINAL UTILITY Law of equi – marginal utility is the second important law of utility analysis. This law point out of how a consumer can get maximum satisfaction out of his given expenditure on different goods. This law concerning the expenditure of the consumer was propounded in 19th century by a French engineer Gossen. Dr Marshall has called it law of Equi Marginal Utility. It states that in order to get maximum satisfaction, consumer should spend his limited income on different commodities in such a way that the last rupee spent on each commodity yield him equal marginal utility. Left witch refer to it as the general principal for maximization of consumer satisfaction. In simple words it is called as law of maximum satisfaction. Definitions:  According to Dr. Marshall, “If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all.”

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According to Prof. Lipsey “The household maximizing utility will so allocate its expenditure between commodities that the last penny spent on each is equal.”

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According to Samuelson “A consumer gets maximum satisfaction when the ratio of marginal utilities of all commodities and their price is equal.”

MU1

MU2 =

P1

MU3 =

P2

P3

If the prices of the commodities are equal, then maximum satisfaction to the consumer can be indicated in the following equation: MU1 = MU2 = MU3

In the above equation MU1, MU2, MU3 refers to marginal utility of the first, second, third commodity and P1, P2, P3 refers to the price of all commodity. Assumptions: 1. Cardinal measurement of utility is possible. 2. Consumer is rational that he wants maximum satisfaction from his income. 3. Income of consumer is constant. 4. Marginal utility of money remains constant. 5. Price of the commodity remains constant. 6. Commodity is divisible into small units. 7. The consumption takes place at a given period of time. Expiation with the help of table Assumption 1. Income of the consumer is Rs.10 2. He spends the entire Rs.10 on both commodity A and B 3. Price of A and B per unit is Rs.2 each 4. He has definite scale of preference as revealed by marginal utility schedule give below

In the above table the consumer has Rs.10 if he spends the entire amount to buy either commodity A or B the LDMU will come into operation. Thus a consumer will have two diminishing curves for two goods A and B. Allocation of income

If a consumer spends Rs.4 on commodity A and Rs.6 on commodity B. this helps him to buy 2 units of A and 3 units of B. 2A+3B = 65+75 =140 units Reallocation of income If a consumer spends Rs.6 on commodity A and Rs.4 on commodity B. this helps him to buy 3 units of A and 2 units of B. 3A+2B = 90+55 =145 units

Diagrammatic representation Importance of the law: 1. Consumption Every consumer wants to get maximum satisfaction from his limited means. He spends that last unit of money in a way to get maximum satisfaction. 2. Production Every producer aims at earning maximum profit. A producer must go on substituting various factors until marginal productivity of each factor is equal. 3. Exchange It implies replacing of goods giving less utility with goods giving more utility. Acting upon the law every person will go on substituting goods giving more utility for the ones giving less utility, till the marginal utility of all becomes equal. 4. Distribution It refers to the distribution of national income among the factors of production that is land labor, capital etc. it is done in such a way that in the long run every factor gets share out of national income according to its marginal utility. 5. Public finance The law also has importance in this sphere of public finance, that revenue and expenditure of the sate. It is insured that the marginal benefit of every type of expenditure should be equal. 6. Distribution of income between saving and consumption According to this law income should be distributed between consumption and saving that the last unit of money spent on present consumption should yield the same utility as the last unit of money kept in the form of saving. Such a distribution is called optimum allocation. 7. Optimum distribution of commodities Optimum distribution of commodities refers to that distribution, a slight change whereof may diminish the total utility enjoyed by society as a whole.

Optimum distribution becomes possible when a commodity is distributed among different persons in such a way that marginal utility derives from each person becomes equal. 8. Distribution of assets: This law helps people distribute their assets in different forms like bank deposits, bonds, stock, share etc. According to this law, investment should be made in different form of assets in such a way that last unit of money invested in each form should yield equal marginal utility. Criticism of the Law: 1. Consumers are not fully rational The assumption that consumers are not fully rational is not correct. Some consumers are idle by nature, and so to satisfy their habits and customs, they sometimes buy goods yielding less utility. Consequently they do not get maximum satisfaction. 2. Consumer is not calculating. The law is based on wrong assumption that while spending his income a consumer constantly calculates the utility derived by him out of each rupee spent. In actual life one hardly comes across such a calculating consumer. So the application of this law is practically difficult. 3. Shortage of goods If goods giving more utility are not available in the market, the consumption will have to consume goods yielding less utility. 4. Influence of Fashion, Customs and Habits Actual expenditure of every consumer is influenced by fashion, customs, and habits. Under their influence, many a time consumer buys more of such goods which give less utility. 5. Ignorance of the Consumer Consumer is ignorant about many things concerning consumption. He is ignorant about right price of goods, less expensive substitute, different uses of goods. The consumer fails to spend his income in a manner that may yield him maximum satisfaction. 6. Indivisibility of Goods The law does not apply to those goods which can not be divided into small parts e.g. Car, LCD etc. 7. Constant Incomes and price Income of consumer is limited as such he can not increase his satisfaction beyond a particular limit. Likewise, prices being constant, he will get only as much of satisfaction as the amount of goods that he can buy with his limited income. 8. Indefinite Budget period The budget period of consumer is not definite. Budget periods refer to that period in which a consumer has to spend his income of different uses. It may be a month or an year. Goods like TV Set, Refrigerator are bought in one budget period, but they continue to yield utility over many budget periods. 9. Cardinal measurement of utility is not possible Utility can not be measured in cardinal number system. How can a consumer say he would get 12utils of utility from first mango and 10utils from second. Unless the marginal utility is estimated application of the law remains dubious.

10. Change in the marginal utility of money In actual life marginal utility of money may increase or decrease. When a consumer buys more goods, he is left with less amount of money. Smaller the amount of money higher is its marginal utility. As a result of it application of the law will become pretty difficult. 11. Complementary goods The law does not apply to complimentary goods because they are used in fixed proportion. By using less of one commodity, use of other can not be increased.

Indifference Curve Analysis ( Ordinal Analysis) Assumptions     

A consumer is assumed to buy any two goods in combinations. A consumer can rank the alternative combinations and compare their level of satisfaction, and he prefers a combination providing a higher level of satisfaction. Consumer is rational and his choices are transitive. The consumer behaviour is assumed to be constant, throughout the analysis. Indifference curve analysis assumes diminishing marginal rate of substitution.

Meaning and Definition An indifference curve may be defined as a locus or path indicating different combination of two commodities which yields equal or same level of satisfaction. According to JR Hicks, “it is the locus of points representing parts of quantities between whichthe individual is different and so it is termed as indifference curve.

Indifference schedule An indifference schedule may be defined as a schedule of various combination of two goods that will equally satisfactory to the individual concern Indifference curve Indifference map A number of indifference curves collectively constitute an indifference map or Family of indifference curves makes an indifference map

Marginal Rate of Substitution Marginal Rate of Substitution (MRS) refers to the rate at which one commodity is substituted for another commodity Properties of indifference curve 1. Indifference curve always slop downwards from left to right In order to represent fall in the quantity of one commodity and increase in the quantity of another commodity. If the curve slope upward, the quantity of both the commodities will go up If the curve is either horizontal or vertical straight line, the quantity of one commodity remain constant and the quantity of another commodity will vary

2. Indifference curve is convex to the origin of the axis To represent the fall in the rate of substitution 3. No two indifference curve intersect each other Because it indicates equal level of satisfaction 4. An indifference curve bearing higher number represents higher level of satisfaction and visa vesa 5. Indifference curve should not touch either axis It indicates buying only one commodity 6. Indifference curve is not always parallel to each other