Utility : Attribute of consumption activity

Utility :  Attribute of consumption activity

Utility plays a pivotal role to understand the consumption behavior of the diverse and heterogeneous consumers for any particular product. Understanding and utilizing the use of a commodity can be expressed by the level of satisfaction attained by a consumer at as given point of time can be expressed or explained by utility.

There are various 2 basic types or methods that are used to measure utility :

•  Ordinal utility
•  Cardinal utility

Ordinal utility: Measured in terms of rankings the level of satisfaction. For example : We watch 5 movies in a day, we rank them according to the level of entertainment.

Cardinal utility : A traditional method used to assign numbers through scales and ratings. For example : We watch 5 movies in a day, we rank them in scale or ratings according to the story, acting, performance and direction etc.

SURPRISING DEMAND FOR ELSS

SURPRISING DEMAND FOR ELSS

We all believe that generally January to March is tax saving months. This is very traditional notion but now a days there is a tool who can change the notion and that tool is MUTUAL FUNDS   and according to several experts investors have already started investing in Equity Linked Saving Scheme(ELSSs) or tax saving mutual fund scheme in this FY 2017-2018.

Investment in ELSS can qualify an individual for a deduction of up to 1.5 lakh under the section 80C of the income tax act.

Many Mutual Fund expert was observing a big positive change in the behavior of mutual fund investor.

Earlier every one think that last three months of financial year and invest in their tax saving instrument and in hurry many times make wrong decisions and this thing keep on repeating every year.

CEO, of Money Works and financial adviser (Nisreen Mamaji), says that campaigns like “mutual fund shi hai” and several campaigns by AMC have a great impact on increasing investment in mutual fund.

A lot of mutual fund adviser trust that positive change in the investing behavior of investor for mutual fund  but they also have some important and valuable advices for the investors. And a lot of experts asks to invest to expectations for real returns and not to expect the market to keep going on. 

Refrence:

https://www.google.co.in/search?client=ms-unknown&ei=yahkW9ynIoyo9QOv4KawCQ&q=demand+for+mutual+fund&oq=demand+for+mutual+fund&gs_l=mobile-gws-wiz-serp.3..35i39j33i22i29i30l4.1102.1102..1372...0.0..0.220.220.2-1......0....1.........0i71.0_HRWyHzKqo

Production Function

Production function shows the maximum amount of output which can be obtained from a given amount of inputs.
Q=K+L
Where
Q is the quantity of output
K is the amount of capital
L is labour used in production
In short run which refers to a short period of time, only labour inputs can be changed. If 100 units is to be produced and there is only 70 units of capital and 20 labours,where capital cannot be changed but labour can be increased from 20 to 30.
In the long run which refers to a long period, both capital and labour can be changed
When 100 units is to be produced both capital and labour can be increased to meet 100 units

Law of diminishing return

LAW OF DIMINISHING RETURN

 

Law of diminishing return  also known as law of diminishing marginal return  states   that at  

some time,adding an additional factor of  production results in smaller increases in output.

As the input increases (while the other input remain fixed) a point will eventually be reached at which the resulting additions to output decreases.

so,basically there are three stages of law of diminishing return and the stages are as follows :

1) When the total product and average product increases , marginal product is first increasing and then decreasing. 

2) when total product is increasing , average product and marginal product both decreases.

3) when total is diminishing ,average product is decreasing and marginal is negative.

thus, Law of diminishing return applies in the short run because in the long run  all the factors are variable.

Diminishing Marginal Utility

• Principle of diminishing marginal utility - The more of a good that one obtains in a specific period of time, the less the additional utility derived from an additional unit of the good.

• Utility diminishes over time - The shorter the time period ,the more quickly marginal utility diminishes.

• Consumers are not identical - The rate at which marginal utility diminishes depends on individual tasks and preferences, and so differs across consumers.

• As the use of an Input increases, a point will eventually be reached at which the resulting additions to output decreases.

There are three stages of diminishing marginal utility-

Stage 1 -Total Product and average product increases ,Marginal Product first increases and then decreases.

Stage 2 - Total product increases , average product and marginal product both decreases.

Stage 3 -Total Product diminishes ,Average product decreases and marginal product becomes negative.

Customer Satisfaction

Customer satisfaction plays an important role in market because higher customer satisfaction leads to greater customer loyalty which in turn gives more new customer and higher profits.

For example: a mobile company launch its first mobile phone and customers are satisfied with that phone so the existing other brand mobile phone users might also want to purchase that phone by seeing that the current user of those phone are satisfied.

Also, price plays a important role in determining profitability. an interesting question is if there are some factors which might allow companies to charge more for their products or services. One possibility is that when customers are satisfied, they might be willing to pay more for the product or service ( a good example would be I phone X which sells at around 90,000 Rs. But customers are still buying it for the quality and the services provided by apple)

Like the above example: existing other mobile phone users paid for mobile is Rs. 25,000 but new mobile company launch its product at Rs. 30,000 with more functions. So if customer is satisfied they will pay more for that product.

If product satisfies the customer, customer is willing to pay more for that product.

Willing to buy and customer satisfaction plays a key role in the market. Market basically depends on the customer satisfaction and their willingness to pay.

Credits - www.acrwebsite.org

                                       

Consumer and Prodecuer Behaviour.

Consumer Behaviour
Consumer behaviour is the study of behaviour of a particular consumer or group of consumers, in which way they react to a particular product and about their purchase,use and disposal of good and services.

Factors affecting Consumer Behaviour

Age
Attitude
Trends
Cultural
Experience

Producer Behaviour
Producer Behaviour means the types, quantity,quality of goods and services he/she is willing to provide to its customers on the basis of the market trends, customer needs and wants etc.

Factors affecting Producer Behaviour

Market trend
Customer needs and wants
Producer vission/goal

Example- suppose Cadbury is thinking of launching a new product in the market, so it will look upon the consumer behaviour such as the age group to target to, experience of consumers from using its past products, should the product be launched on any festival etc.

Elasticity In Brief

What is Elasticity?

An Elasticity of demand is a measure of the sensitivity of one variable(i.e, Quantity demanded) to another(i.e, Price or Consumer Income). Percentage change that will occur in one variable in response to a percentage change in another variables.

Different types of Elasticity of Demand:

•         Price Elasticity of Demand: Degree of responsiveness of a change in quantity demanded due to change in change in price. This is known as Price elasticity of Demand. Price Elasticity of Demand can be further divided into five types- Perfectly Elastic Demand, Perfectly Inelastic Demand, Relative Elastic Demand, Relative Inelastic Demand and Unitary Elastic Demand.

                                          

• Income Elasticity of Demand: Degree of responsiveness of a change in quantity demanded due to change in Income of the consumer. If Income Elasticity of demand is more than 1 than it will indicate that change in Income will have effect in change in quantity demanded that to in the same direction.

        

•        Cross Elasticity of Demand: Degree of responsiveness of change in quantity demanded of one commodity due to change in price of another commodity. This elasticity happens mainly between complementary or substitute commodity.

         

Consumer satisfaction

The concept of utility says, the satisfaction people derives from their consumption activities. Now the term utility should be differentiated from satisfaction.

     Utility implies expected satisfaction where is satisfaction stands for realised satisfaction.
A consumer thinks of utility, when he is contemplating the purchase of commodity, but he secured the satisfaction only after having consume the commodity.
Utility and satisfaction both have different meaning, but the theory of consumer behaviour believes both are synonymous.
When we rate the song or the story or the acting on a movie on a scale of 1 to 10 that means multiple parameter is there, that measurement is called as Cardinal measurement of utility.
But we prefer the method of ranking over rating.
When we are signed rank, for example top 10 engineering colleges, then this kind of measurement is called as ordinal measurement of utility.

Principle of diminishing marginal utility says, the more of a good that are obtained in specific period of time, the least the additional utility derived from an additional unit of good.
Marginal utility diminishes more quickly with the shorter time period.
The rate of diminishing marginal utility differs accross customer because it depends on individual taste and preference.

MEANING OF UTILITY

Meaning 

• Utility means the power of commodity that satisfy any want of person. It is a satisfaction derived by consumer after consuming any product .
• A power of a commodity to satisfy human wants .
• When a commodity is capable of satisfying human wants , we can conclude that the commodity has utility.
•  Utility differ from person to person, place to place and time to time .
• There was no standard unit for measuring utility so,economist derived an imaginary measure known as "util".

 e.g-

 A child needs a glass of milk if he consumed this commodity and satisfy then milk have some utility   to satisfy the need of that boy.

Characteristic of utility

1)  It is subjective - it means it differ from person to person.

e.g - if a person who like mango juice ,if he consume on glass of juice he has maximum satisfaction.

but if the person who do not like so much juice if he consume satisfaction will be low.

2) Different from pleasure - A commodity may have utility but its consumption may not give any pleasure to the consumer

e.g- an injection or medicine tablets gives no pleasure but it is very necessary for every patient.

3) It is different from moral point of view

e.g -  the person who drink wine he gets satisfaction but it not consider moral.

4) It is differ from usefulness  

e.g - cigarette may give satisfaction for cigarette smoker , but it is injurious to health.

5) It can be both positive as well as negative .

e.g - when the fist time any consumer consume something then utility will be more but when he will consume more and more utility may be negative.

6) It related to consumable goods only

e.g - mango,because mango can consume any consumer so mango have some utility for consumer.

ABOUT PRODUCTION FUNCTION

CONCEPT OF PRODUCTION :

                                                     PREPARATION OF SEMI FINISHED GOODS INTO FINISHED GOOD , CALLED PRODUCTION.

FUNCTION : 

                       PROCESS OF WORK ,CALLED FUNCTION.

PRODUCTION FUNCTION: FROM THE MINIMUM INPUT ,THE ABILITY OF PRODUCING MAXIMUM OUTPUT, CALLED PRODUCTION FUNCTION.

                                                          Q = (K ,L)

                          WHERE,

                                          Q = QUANTITY PRODUCE 

                                          K = CAPITAL APPLIED

                                          L  = LABOR

                  NOTE : K IS A FIXED VARIABLE

                                L IS NOT A FIXED VARIABLE 

      

IN A COMPANY PRODUCTION IS DONE ON TWO BASIS ,I.E; LONG TERM AND SHORT TERM.

 

IN SHORT TERM ,  COMPANY DO PRODUCTION IN A FIXED INPUT BECAUSE AT THAT TIME COMPANY DON'T HAVE ABILITY TO PROCURE INPUT.

 

IN LONG TERM  , COMPANY HAS THE ABILITY TO PROCURE MORE INPUT BECAUSE COMPANY HAS MORE TIME.

What is utility, characteristics and type of utility

The power of satisfying the wants of the consumer is called utility. It is also means satisfying the human want according to their taste and preferences.People allocate their income to maximize their satisfaction of total utility.
We can measure utility in utils. There are two different ways of measuring utility-
Cardinal utility: Cardinal utility is a utility that the customer measures their satisfaction in terms of quantitative number such as 1,2,3 etc
Ordinal utility: ordinal utility is a utility that the customer satisfy themselves by consumption of product or services but it cannot be measured numerically .

Characteristics of utility
It depends on want of consumer.
It is related with consumable goods.
It differs from satisfaction.
It is measurable.
It can be both positive as well as negative.


Kinds of utility:
Marginal utility- Marginal utility is the additional utility derived from consuming of one more unit of good or services.

Average utility- Average utility is a utility in which the total consumption of good is divided by number of total  units.

Total utility- Total utility is the total satisfaction received through the consumption of given total quantity of goods.

Cardinal utility Vs Ordinal utility

We always look for better products . By better product we mean that a product which is better in comparison with the other products that are there in the market. We never want to know what the usage or what are the benefits of the product today or the quantified value of the product we just want to know how much  the product is better than the other existing product.  For example when purchasing a fairness cream we do not look at what are the benefits or what are the ingredients , how much percentage of  valuable ingredients it contains but we always look for how much better is this cream than the other cream that are there in the market. We now live in a world where we buy or do things after comparing it with the other things .So we can say that  ordinal utility is more important than the cardinal utility. Cardinal utility does not gives us a chance to compare because it makes comparison tedious.

Cardinal and Ordinal Utility, the two sides of the coin.

What is utility?

Before we get to know about the cardinal and ordinal utility, first let us understand what exactly the term "utility" is about. The total satisfaction that an individual gets after using a product or service is termed as utility. In other words, utility is basically the capacity or the quantity of a product that satisfies the human wants. We all use utility while taking any decision in our day to day life without being aware of the same. For example- when we have an option to purchase between Bournvita and Horlicks, then first we compare the utility that we would derive from both the choices and then select the one from which we get the maximum satisfaction. This is what utility is. It is measured by a unit called as "utils." Now let us see the difference between cardinal amd ordinal utility.

CARDINAL UTILITY~ 

Meaning-When the customer gets satisfaction by using a product or service that can be expressed numerically, then it is termed as cardinal utility. For example, a boy named Rohan purchased a new scooty. So he can say that the new scooty gives him 6000 utils of satisfaction than his old scooty which gives him 2000 utils of satisfaction. 

Approach- 

Cardinal utility is quantitative in approach, i.e. it can be measured only in terms of quantities.

Measurement-

Cardinal utility is measured in a unit termed as utils.

ORDINAL UTILITY~

Meaning- 

When a customer gets satisfaction by using a product or service which cannot be expressed numerically, then it is called as ordinal utility.

For example-  A person can tell subjectively that he prefers to eat maggi than noodles.

Approach-

Ordinal utility is qualitative in approach, i.e. it can be measured as per the quality.

Measurement-

Ordinal utility is measured in terms of rankings on the basis of preference of the product when compared to each other.

Utility and its types

Utility is the amount of satisfaction that you will get from the consumption of a product or service.

There are two types of utility are there:

A)Ordinal Utility: It is the need of the consumers preference for one commodity over another or for one basket of goods over another.

Assumption:

1) Rationality-
Assume that the customer is rational who is at maximum is level of satisfaction for given income and prices of goods and services which is used to consume.

2)Ordinal utility-the consumer that only Tennis order papers for the given goods and services.

3)Transitivity and consistency of  choice-The consumer’s choice is expected to be either transitive or consistent. The transitivity of choice means, if the consumer prefers commodity X to Y and Y to Z, then he must prefer commodity X to Z.The consistency of choice means that if a consumer prefers commodity X to Y at one point of time, he will not prefer commodity Y to X in another period or even will not consider them as equal

4)Nonsatiety-customer has not reach the saturation point of any commodity and and later he prefers all the commodities in large quantities.

5) Diminishing marginal rate of substitution-The marginal rate of substitution refers to the rate at which the consumer is ready to substitute one commodity (A) for another commodity (B) in such a way that his total satisfaction remains unchanged.

B)Cardinal Utility-Cardinal utility is nothing but a feeling of satisfaction pleasure happiness which a consumer derives from the consumption of a commodity. Another word is is the one satisfying power of a commodity.

Assumption-

1) utility of a commodity reminding a consumer is willing to pay for it

2) marginal utility of money remains constant.

 

PRICE ELASITCITY AND INCOME ELASTICITY

The responsiveness of consumers to a price change is measured by a product's price elasticity of demand.

The concept of price elasticity also applies to supply. It is defined as percentage change in quantity supplied for percentage change in quantity demanded.

THE SHORTRUN:

It is a period of time too short to change plant capacity but long enough to use fixed plant more or less intensively. In the short run, the farmer's plant is fixed but he does have time to cultivate vegetables more intensively by applying more labour and more fertilisers, pesticides to the crop.

 

THE LONGRUN:

It is a time period long enough for firms to adjust their plant sizes and for new firms to enter the industry. In the vegetable industry the farmer will have the time to aquire additional land and buy more machinery and equipment. 

Income elasticity of demand measures the degree to which consumers respond to a change in their respond to a change in their incomes by buying more or less if particular product. It is defined as a percentage change in quantity demanded for the percentage changing income. 

NORMAL GOODS:

Goods that are demanded as income rises.

INFERIOR GOODS:

Consumers decrease the purchases as their income raise. 

Negatively Sloped - Indifference Curve

Indifference Curve is basically a curve showing combination of goods that gives same level of utility i.e. the consumer is indifferent.
Left to right is the direction of this Indifference Curve which is because of the reason that if a consumer has to increase consumption of one more unit of one good, he must sacrifice one unit of other good in order to maintain same level of satisfaction.
And a set of indifference curve having different level of satisfaction is called an Indifference Map.

Now this negatively sloped Indifference Curve have some characteristics :

1. Become less steep as we move down to the right. 
2. IC is convex to its origin
3. IC never intersect. 
4. IC to the right represent higher level of satisfaction. 

Approach To Production Function

Production is the transformation of raw materials into finished goods. It is the total output that is achieved by the combination of a chosen pool of inputs.  The production function can be mathematically written as :
               Q=f(x1,x2,......xk)
                        Where,
                      Q=output
              x1,x2,.......xk= inputs
For our current analysis let's reduce the inputs to two, capital (K) and Labour(L)
                         Q=f(L,K)
Uses
✓To obtain total maximum output .
✓Helps the producers to determine     whether employing the valuable inputs are profitable or not.
✓To make a combination of inputs so as to gain the maximum output.

Fixed inputs
They are the factors that are independent of the output of the firm in the short run and remain unchanged .Example: machines, factory building , plants etc.

Variable inputs
They are the factors that change with the output of the firm in the short run Example: labour, fuel ,power etc.

Total product (TP)
Maximum output that can be achieved at a given specific period of time by increasing or decreasing the quantity of variable factors.

Average product (AP)
Is equal to total product divided by the amount of input used to produce that total product.
           AP=TP/Total inputs

Marginal product (MP)
It is the amount that is added to total product when there is increase of one unit of a single input, given that the other inputs are constant.
                  MP=WQ/WL
                       Where,
          W =change in input

Concept of utility in microeconomics, its meaning, total utility and marginal utility

Meaning of utility :

Utility means wants of satisfying a commodity. It is derived from the consumption of the commodity. we can derive utility by cardinal measure to know consumer's consumption of good and services.


Total Utility :

Total utility refers to total satisfaction derived from the consumption of goods and services by the consumers.
For ex : 1st chocolate gives you satisfaction of 10 utils and second chocolate gives you the satisfaction of 8 utils, then TU is 10+8 = 18 utils.


Marginal Utility :

Marginal utility refers to the additional utility obtained from the consumption of one more unit of the given commodity.
MU can be calculated as : MUn = TUn - TUn-1.

Production Function!

Production means a process by which resources(men,material,time,etc.) are transformed into a different and more useful commodity or services.
                                   OR
In general sense ,Production means transforming inputs into an output.

Production Function states the relationship between inputs and outputs in the form of an equation,a table or a graph. It specifies the inputs on which the production of a commodity or service depends. A production function may take the form of a schedule or a table ,a graphed line or curve,an algebraic equation or a mathematical model.
         Q=F(K,L) where L-labour
                                       K-Capital
Lets take an example of algebraic form of production Function,let us suppose that a coal mining firm employs only two inputs- capital(K) and labour(L) in its coal production activity.As such,the general form of its production function may be expressed as
         Qc=f(K,L)
Where Qc=the quantity of coal produced per time unit
K=Labour & L =Labour.

The Concept Of Law Of Diminishing Marginal Utility

The Concept Of Law Of Diminishing Marginal Utility 

Introduction:

The law of diminishing Marginal Utility was first stated by the H.H Gossen in 1854 and later it was developed and popularized by Alfred Marshall. This law is based on the common experience of every consumer.

Explanation of Law:

This law explain the relationship between the quantity of a commodity and its utility. The law states that if the consumer increases the consumption of any particular commodity, the marginal utility or the satisfaction derives from that commodity decreases continuously.

Assumptions:

This law is based on following assumption. They are as follows

• Utility measured and compared numerically.
• Consumer is a rational being which means he/she always tries to get maximum satisfaction.
• There should be no gap between the consumption of one unit and the another unit.
• All units of commodity are in identical quantity,taste and size.
• The unit of commodity should not be too long or too small. They must be in reasonable size.
• The income and the taste of the consumer should be constant.
• The commodity is divisible in to small units
• Price of the commodity should remain constant 

The law of diminishing marginal utility can be explained with the help of the following table

                          

NO of Apples	Total Utility	Marginal Utility
1	20	20
2	35	15
3	45	10
4	50	5
5	50	0
6	45	-5
7	35	10

Total Utility:

The total amount of satisfaction which a person derives from the consumption of all units of the commodity is called total utility

Marginal Utility:

The additional utility derived from the use of an additional unit of good is called marginal utility 

                               

                                                              MU=TU_2­-TU₁

_{In the above table when the number of apples consumed increases the total utility increases up to fifth apple and then it diminishes but the marginal utility diminishes continuously} 

Limitation:

• This law will not apply in the case of money because the MU of money never decreases.
• The law is not applicable for durable goods because we can use them for a longer time 
• This law is not applicable for the complementary goods

Conclusion:

 Despite of the above limitations the law of diminishing marginal utility has a great theoretical and practical in economic analysis.

UTILITY

UTILITY

Utility is a term explained by Economist that refers to the usefulness of a product which consumer receives by using of goods and services. Utility is basically the satisfaction or capacity of commodity to provide satisfaction. Utility is the basic needs of consumer. Consumer try to find utility in each and every things. For instance: If I want to buy new clothes, I will look for the clothes until I get the one that give me utility. The more Utility I'll receive more will be the demand of the product and services.

In Economics, we consider consumer as rational. So rational consumer are the one who can relate utility to real life, understand its applicability and can experience it also. This is because everyday consumer get satisfied by using one or other commodity. But rational consumer is the one who identifies it , achieve maximum benefits and also know the consequences of it. This is because more usage of product and services can also lead to negative results. That's why we should analysis it carefully. So, if the consumer is rational can easily get this concept. Utility is very wide term. It includes Total utility, Marginal Utility, Average Utility and so on.

Total Utility is the total satisfaction received by the consuming total quantity of goods and services.

Marginal Utility is the additional utility received by the gaining another quantity of goods and services.

Average Utility is that utility in which total unit of consumption of goods  is divided by number of units.

Utility get maximized when consumer make full use of resources within the given budget and can get enough satisfaction.

As per textbook, Utility can be measured in cardinal( Numeric) term and ordinal term and it is measured in util.

UTILITY THEORY

BRIEF ABOUT UTILITY

What do you mean by 'utility'? In a word utility indicates satisfaction. More precisely, it refers to how consumer rank different goods and services. Often, it is convenient to think of utility as a subjective pleasure or usefulness that a person from consuming a goods or services.

Utility is a function or feeling that can be observed or measured. Rather utility is a scientific construct that economists use to understand how rational consumer make decision. We derive consumer demand function from the assumption that a people make decision that give the greatest satisfaction or utility.

"In the theory of demand, we assume that people maximize their utility, which means that they choose the bundle of consumption goods they most prefer.

So, lets take a example, if basket A has a higher utility than basket B, for Jhon this ranking indicates that Jhon prefers basket B.

Utility in Economics

In Economics, Utility refers the satisfaction, which people get from their consumption activities.
Imagine you bought a pair of shoes. The satisfaction you are getting from the shoes, that is utility. Each and every person has different test and preferences. So Utility should varies from person to person.
Utility can be measured in two ways- 1. Cardinal Utility and 2. Ordinal Utility. Cardinal Utility can be measured in a scale and Ordinal Utility can be measured on the basis of ranking. Imagine you bought two Shirts, among them, according to you, first shirt's utility is 100 utiles and second shirt's utility is 150 utiles. This is Cardinal utility. And as the second shirt's utility is more than first one, so the second shirt's rank will be 1 in respect of utility. This is Ordinal Utility.
Utility can decrease gradually over the time. The more shorter the time period, merginal utility decrease more first. Think why World Cup is organised in a gap of four years or why telecom operators give offer like ‘unlimited free night calling’. If World Cup will organised in every year, we will lose our interest on World Cup which means Marginal utility will decrease. This is a characteristic of Utility.

CARDINAL and ORDINAL UTILITY in Day to Day Live Example

In today's era mobile market is in boom. We have a entire huge collection of brands to choose. So if some one wants to buy a new phone today he/she will definitely research a bit before buying it,then the person will go through the ratings of the phone as well as ranking of mobile brands, Here we are talking about Cardinal utility and Ordinal Utility. 

If we say BRAND A gives 4000 units of utility then BRAND B  would give 6000 unit of utility. We are talking about cardinal utility. It is basically when a consumer talks about rating.

On the other hand ordinal utility is about customer preferences . Suppose BRAND A has more customer liking  then BRAND B then here we are talking about ranking .

Law Of Diminishing Return

Law of diminishing marginal explains that when more and more units of variable inputs are employed on a given quantity of fixed inputs, the total output may initially increases at increasing rate, then at constant rate, but it will eventually increase at diminishing rate.

So,Some of the definitions that is given by some economists are:

According to G.Stigler," As equal increments of one input are added, the inputs of other productive services being held constant, beyond a certain point the resulting increments of product will decrease ,i.e; the marginal product will diminish."

According to F.Benhan,"As the proportion of one factor in a combination of factors is increased, after a point, first the marginal and then the average product of that factor will diminish."

So, basically there are 3 stages of diminishing return:
1. Total product and Average product increases, Marginal product is first increasing and then
    decreasing.
2. Total product is increasing, Average product and Marginal product both decreases.
3. Total product is diminishing, average product is decreasing and Marginal product is negative.

Does consumption of a product decreases its level of satisfaction?

    Yes, it decreases because of the law of marginal utility, but before going to the concept of the law of marginal utility let as know what is Utility?
 
Utility is described as the level of satisfaction that a customer or consumer derives by
consuming a particular product at a given period of time.
                                                               
Law of diminishing marginal utility states that the more and more you consume a particular product at a particular period of time the less additional satisfaction you derive from it.

Example: You are very thirsty, the first glass of water you drink gives more satisfaction                        than the second one, and the level of satisfaction decreases as you go on consuming more water,
the satisfaction level will be zero at a particular point of time and go negative you don't want to
drink water.

Urge of Utility

Imagine you are back to home after a tiring day and are hungry. You are in dire urge to curb your hunger. At the kitchen you find your favourite dish - pasta. You jump into the bowl and start having it. The first three to four spoonsful are heaven for you. As you keep on eating it, the interest or urge somehow keeps on going low. You tend to feel less satisfied.

Economics connects a term related to this behaviour called utility. It is the feeling of satisfaction, pleasure, happiness which a consumer derives from his consumption activities.   A term util meaning units of utility is used here.

The example which we illustrated above basically explains the ' law of diminishing marginal utility.'- the more of a good that one obtains in a specific period of time, the less the additional utility derived from an additional unit of good  which means that as more and more quantity of a commodity is consumed, the intensity of desire or urge decreases.  We begin to lose interest in a thing after we use it beyond a certain point. For every additional unit we consume, the marginal satisfaction generated starts to decrease, as happened when you feel less urge to have your favourite food after three to four spoonsful ie, the more the quantity of food is consumed, the urge or intensity of pleasure decreases and you feel bored. 

The concept of Marginal Utility with tasty Paranthas

As we all dool over the tasty paranthas.But do we know that why after eating some,we don't feel like eating more.This is because of marginal utility.
    Marginal utility means when we first consume one parantha,we are much satisfied and happy,then if we consume the second parantha the satisfaction level decreases from the first one. And again if the thjrd parantha will be eaten,then the satisfaction level will be even more less.
               Marginal utility is a very important concept in economics, as it helps in determining how much an item a consumer will buy.

How utility leads consumer buying behaviour

As you know consumer behaves rationally which means they do the cost benefit analysis and choose their favourable product.
But rationality also have a boundary where they can't choose the product because of lot of option and each having different benefits.
Consumers taste and preference also different. People’s need some satisfaction and it leads to the consumption activity to the concept of utility came into existence in economics

Utility - utility of a product means a product which is having some value of usability for a time.

When a consumer thinks about purchasing he keeps that utility of product in his mind. But there are certain assumptions to support the utility according to economists.
1. Taste and preferences are fixed
2. People allocate their income to maximize their satisfaction or total utility.

But now these exemptions are not relevant because due to the introducing of new players frequently in market the quality and taste of the goods and services are changing and people also trying this and changing their choice and preference.

Rational people think at margin allocates is resources to get the basic needs for then after that he wants to fulfill the demands and wants and think about the satisfaction.

Utility & Its Characteristics

MEANING OF UTILITY:

Simplest Meaning of "Utility" is "Usefulness".In economics utility is the capacity of a commodity to satisfy human needs.In the present situation,utility has been called as "Expected Satisfaction" where we will get from the simplest things which will happen in our day to day life.Sometimes Expected Satisfaction may be less or equal to or more than what we want.

Let us assume if a person is feeling Hungry.At that time he is having fruits or any junk food with him.But the way he shows interest while eating the first thing from the fruit basket is high and it keeps on decreasing for the second time because there will be less satisfaction or the interest showed by him  for the second thing decreases is called "Principle of Diminishing marginal Utility".

Suppose if a person wanted to buy a I-phone .He is going to check what are the present trending one's but he won't go for the old one(or)previous model.Here the time period of that particular  product(i.e.I-Phone) is a time constraint.Here we can observe the "Utility Diminishes Overtime".

Every person is having different tastes and different preferences for such a single product.If a person likes coffee and some other like fruit juice or any other thing.Here the tastes of consumers differs from person to person.That is the "Consumers are not identical".

THE LAW OF DIMINISHING MARGINAL UTILITY

This law states that as more and more standard units of a good is consumed, marginal utility derived from every additional unit must decline. This law states that after a certain level of consumption, marginal utility goes negative due to unpleasant experience or dissatisfaction.

For instance, on a hot summer day, you are feeling very thirsty. Therefore you go to a juice shop and order a glass of lime juice. The first glass of juice will provide you with maximum satisfaction say, 100 utils that is he is in the state of equilibrium. Consumer equilibrium is a situation where a consumer gets maximum satisfaction out of his given income and existing market prices. Now as you get the second glass of juice,this will probably decrease your utility to maybe 60 utils. The utility from the 3rd glass would be even less. There will be a point where the utility will be 0 and further consumption may lead to dis-utility.

BASIC ASSUMPTIONS

1. Commodity is consumed in some standard units such as a cu of tea or a glass of water and not a soon of tea or a drop of water.

2. There is continuous consumption of the commodity that is after two hours may give less, equal or more utility.

3. Quality of commodity should not change.

4. Consumer must behave in a rational manner.

Understanding Consumer/ Producer Behavior

• Understanding decision by human decision making units with reference to their production, acquisition, usages and disposition of good, services, activities and ideas in a given time period.

• Assumption:

                 Preferences are complete, transaction and non-satiated.

     Willingness to buy and consumer satisfaction

• The concept utility

                The satisfaction people derive from their consumption activities.

• Assumption:

                  Tastes and preferences are fixed and given and play a large role in decision making.

                  People allotted their income to maximizing their satisfaction or total utility.

THE UTILITY OF USING SOMETHING

  THE CONCEPT OF UTILITY: CARDINAL AND ORDINAL

       First of all let us understand what is utility ? 

• Utility is the satisfaction that people derive from the consumption activities. 
• If a commodity is expected to fulfill the need of the customer, the commodity is said to have utility. For example: A person buying multivitamins is expecting that the multivitamins will help him in maintaining good health. This means the multivitamins have utility.

CARDINAL UTILITY: Cardinal utility is a quantitative concept      and can be measured in terms of number. For example: If Audi a      car gives 4000 units of utility, a Lamborghini car would give            7000 units. It is important for economics which tries to put value      on consumption.

ORDINAL UTILITY: The customers only ranks choices in              terms of preference but we do not give exact numerical                    figures for utility. For example: We prefer Lamborghini car to a        Audi car, but we don't say by how much.

UTILITY AND ITS MEASUREMENTS AND TYPES OF UTILITY

Utility:

        Utility is the satisfaction the customers obtain after consumption of a product.The purchase of product should be able to satisfy the customer.Preferences and tastes varies for every person.Generally there are no standards units for measuring utility. Later they developed a new measurement known as utils.Utils cannot me measured.These are subjective.

              Ex: The happiness we get after purchasing a new car.

 Generally Utility can be measured in two ways:

Cardinal Utility:

          In Cardinal Utility we can assign numerical value to utility.Ratings are used to measure cardinal utility. Cardinal Utility mainly focuses on quantitative measurement.

             Ex: If we purchased a product online to express our satisfaction we give ratings to the product or website.

Ordinal Utility:

         Rankings are used to measure Ordinal Utility.It cannot be measured using numerical units.Ordinal Utility mainly focuses on qualitative measurement. 

             

             Ex: I prefer buying clothes rather than buying gold.

The behavior of a consumer can be explained using three types of utility:

Total Utility:

         Total Utility is total satisfaction we get from the  purchase of total  quantity of  products or services.

Marginal Utility:

         Marginal utility is additional satisfaction we get after purchasing one more unit of commodity.It differs by one unit from total utility.

Average Utility:

          Average Utility is  satisfaction we get per unit commodity.

PRODUCTION FUNCTION

MEANING OF PRODUCTION FUNCTION:-

The production function specifies the maximum output that can be produced with a given quantity of inputs. The relationship between the amount of input required and the amount of output that can be obtained is called the "production function".

A production function is a mathematical expression to relationship between the quantities of input employed and the quantity of output produce.

In simple case , where there are assumed to be only two inputs labour(L) and capital(k) and one output (X), the  production function  ,X=F(L,K).

TYPES OF PRODUCTION FUNCTION

SHORT TERM PRODUCTION FUNCTION - Term in which one or more factors of production cannot be changed . Over this peroid factors cannot be varied is called  fixed factor.

LONG TERM PRODUCTION FUNCTION - In long term peroid all inputs are variable.

Principle of Diminishing Marginal Utility

Principal of Diminishing Marginal Utility

The more of a good that one obtains in a specific period of time the less additional utility is derived from an additional unit of good. It is also the additional satisfaction that a customer gain after consuming one more unit of certain goods or services. There are two types of Marginal utility:

• Positive Marginal utility-  It is when the additional utility of an item increases the total utility.
• Negative Marginal utility- It is when the additional utility of an item decreases the total utility.
• For example:  A person has 5 chapati, he is quite hungry and decides to eat 5 chapati.He ate one chapati and gains positive utility. This is so because he was hungry the very first chapati has high benefit for him. Then he ate 2nd chapati his appetite is became satisfied as he wasn't as hungry as before,this second chapati had smaller benefitsas compared to first one. The 3rd chapati holds even less utility as the individual is not hungry any more. The fourth chapati will make him experience a diminished marginal utility as well aa it will become difficult for him to consume it. Finally the fifth chapati cannot be consumed by him. This will now result in negative utility.

LAW OF DIMINISHING MARGINAL UTILITY

Law of diminishing marginal utility states that more a good one individual consumes in a specific period of time, the less the additional utility is derived from an additional unit of good.
This simply means the more you consume a good the less amount of satisfaction you will receive.
This varies from individual to individual as everyone has a different identity i.e diminishing factor depends on ones tastes and preferences. For example: there are two individuals. One who likes tea very much and another who likes it occasionally. Now the first person will have 3-4 cups and have same satisfaction while the other one will have all the satisfaction in his one cup. Satisfaction after these points will start to diminish as they will not feel it in the same way a they felt in the earlier cups.
Time also plays an important role in this law. If the individual consumes too much of good in a very short period of time the more quickly marginal utility will diminish. For example: if an individual given a single type of food day and night, the satisfaction derived after every meal will start to decrease very rapidly.
There are few exceptions to law of diminishing marginal utility as well. Hobbies of an individual are an exception. The more and more you pursue it the more satisfaction you achieve. Misers are exceptions as well. They try to derive maximum utility with every extra unit consumed. Valuable and rare goods are also not a part of this law.

Is WONDERLA worth it?

Wonderla:

Here is brief know about WONDERLA, it is the largest amusement park chain in India with 3 parks located in Bengaluru, Kochi and Hyderabad. Now let us know about what Bengaluru Wonderla offers:

55 land and water rides

musical fountain

laser shows

virtual reality shows 

rain dance floor and many more.

But what is so attractive about it? UNLIMITED RIDES, so this makes people excited to visit Wonderla assuming that Wonderla is worth spending.

But being economics student what comes to the picture is? UTILITY CHARACTERISTICS :

1) The more number of times we play the rides and watch the shows, the less satisfaction is obtained from that rides/shows. This is called as Principle of diminishing marginal utility (the more of a good that one obtains in a specific period of time, the less the additional utility derived from an additional unit of the good)

2) Wonderla timings is from 11am to 6pm( weekend 11am to 7pm), so within that particular time we try to enjoy/satisfy as much as possible. Here time is a constraint. That is Utility diminishes over time ( the shorter the time period, the more quickly marginal utility diminishes)

3) Each individual has different tastes and wants unique experiences from Wonderla. So Wonderla experience differs from person to person according to their personal tastes and experiences. That is consumers are not identical (the rate at which marginal utility diminishes depends on individual tastes and preferences and so differs across consumers)

But from visitors point, they assume that all rides and shows can be completed in that particular time period and they also assume that they gain same amount of satisfaction for every time experience rides and shows.

So visitors feel that amount(cost of entry ticket) spent on Wonderla is worth.

Wonderla management clearly know about the Diminishing marginal utility.

Unlimited buffet restaurants:

Diminishing marginal utility applies even on unlimited buffet restaurants where the restaurants offer unlimited food within particular time period. Every additional food item we consume - utility or satisfaction decreases. 

Some more examples : 

Unlimited calls and messages offered by certain companies.

Daily bus passes by BMTC(Bangalore Metropolitan Transport Corporation)

Advertisements

Train tourist passes and many many more.

Concepts of Indifference Curve

Concepts of Indifference Curve 

Indifference curve 

Indifference curve is the graphical representation which shows the different combination of two goods that gives the same level of utility to the consumer.

Here in the diagram x- axis is measuring Goods X and y- axis measuring Goods Y. The point A, B, C, D joined together showing different combinations to form an indifference curve. Like from the diagram we can see that combination A(8X+1Y) gives the same level of utility as B(6X+2Y) and so on.

Characteristics of Indifference Curve:

• Indifference Curve is always downward sloping or negative sloping.
• Indifference Curve are convex to origin.
• Indifference Curve never intersect each other.
• Indifference Curve is less steep when move down to right.
  

Indifference Map

Cluster of two or more Indifference Curve is known as Indifference Map.

Here in the diagram there are cluster of indifference curve (IC1, IC2, IC3, IC4) are known as Indifference Map.

CONCEPT OF UTILITY AND HOW IT CHANGES

What is utility?
The satisfaction people derive from their consumption activities.Utility is the want satisfying power of any commodity or capacity of a commodity to give satisfaction.
At the end of the day you should be happy because you are in pursuit of happiness.
This satisfaction in economics is termed as utility. It is the satisfaction level.
Example- you have a choice of either studying or playing cricket. You compared the utility you are going to get from both. You thought if you play cricket at that particular time you will be satisfied so you decided to play cricket.
Types to measure utility
Ordinal utility vs cardial utility
Cardial utility basically gives ratings. For example: Bahubali 2 movie got 8.8 IMDB rating. The way how you quantify is cardial utility.
That rating then leads to ranking. For example: Bahubali became the best film i.e. it ranked 1st among all other films released with it. Once its ranked we only go for ranks. We will definately go for top 10 films of that month.
This ranking process is ordinal utility.
HOW UTILITY  DIMINISHES?
Principal of diminishing marginal utility: The more of a good that one consumes in a specific period of time the less additional utility derived from additional unit.
Example: Suppose you are very hungry and you bought 5 cakes for youself. You ate the 1st cake
and it had a high satisfaction. When you are eating the second cake your appetite is getting more satisfied. When you are taking the third you are actually getting less benifit or less satisfaction and the utility decreases.
Utility diminishes over time: The shorter the time period the more quickly marginal utility diminishes.
Consumers are not identical: The rate at which marginal utility diminishes depends on individual tastes and preferences and so differs across customers.
Example: Suppose a new movie released. You may liked that story so much that you watched 3 times and tgen got satisfied on the other hand your friend watched only once and he got satisfied and did not want to watch again.

HOW DO WE MEASURE UTILITY?

Before seeing how to measure utility, let us see what does utility actually mean :- The Concept of Utility is the satisfaction people derive from their consumption activities.

 Assumptions :-

·         Tastes and preferences are fixed and given, and play a large role in decision making.

·         People allocate their income to maximise their satisfaction or total utility.

Now to measure utility there are two approaches, they are  :-

1.       CARDINAL UTILITY.

2.       ORDINAL UTILITY.

Let us discuss about each in detail.

CARDINAL UTILITY

Cardinal utility says that we can measure the utility that is derived from a product in quantitative terms. It also specifies about “UTILS”, which according to the cardinal approach, is the units to measure utility. Let us understand with an example.

Suppose if you buy a Xiaomi smartphone you will get 4000 units of satisfaction and on buying an Apple IPhone you will get around 9000 units of satisfaction. This assigning of a quantitative value to a level of satisfaction derived (which is basically a psychological factor) is what is called as CARDINAL APPROACH.

Another example can be the product ratings we find on e-commerce sites, where the level of satisfaction of the user of the product is often measure on a scale of 0-5 or 0-10 and so on. This is also an example of cardinal approach.

There is another group of economist’s that believe that utility cannot be measured in quantitative terms, hence we have what is called as the ORDINAL UTILITY APPROACH. Let us see in detail

 

ORDINAL UTILITY

Even after knowing rating’s, we tend to focus of ranking or ORDINAL UTILITY. Ordinal utility says that we cannot measure utility in perfect quantitative terms. But we can definitely rank them accordingly and say which gives us more satisfaction over the other.

For example, let’s say a person who is very thirsty at the moment and he is provided with a sandwich and a glass of water. It might not be possible to say how much how much satisfaction is derived from each but, he can easily say that which of the two gives him more satisfaction. In this case as he is thirsty, the glass of water will provide him more satisfaction. This approach to measure utility is what is called as ORDINAL “UTILITY APPROACH”.

In real world usage there is no perfect rule as to which is used in every case, but it is a mixture of both cardinal utility and well as ordinal utility.

Diminishing Marginal Utility

In previous blog i had written about ''INCOME ELASTICITY OF DEMAND & IT'S TYPES''. Well now i am going to discuss different topic, i.e, ''DIMINISHING MARGINAL UTILITY''.

LOW OF DIMINISHING MARGINAL UTILITY, was first given by Prof. Gossen as "Low of satisfaction". later on, it defined by Dr. Alferd Marshal. This low also known as Gossen 1st low then after it known as Low of Diminishing Utility.

Diminishing marginal utility says, when a consumer consumes any product continuously, satisfaction derive from additional unit decreases.

In simple words we can say, when we keep consume a particular product, our satisfaction start goes down. 



GRAPHICAL REPRESENTATION 












According to the this graph of the table, when we consume 1st unit of commodity (U1) we get maximum satisfaction at (M1) , when we consume 2nd unit of same commodities (U2), marginal utility decreases to (M2). So on a point marginal utility become zero and further goes down negative. so we can say Marginal utility diminishing with the additional consumption.

Utility of a commodity

UTILITY :

What is  utility ?

It is the ability or property of a commodity or service to satisfy a want.
# It is the satisfaction that a person derives from the consumption of a good or service.
# It varies from person to person , place to place and time to time.

▪Difference Between Cardinal Utility & Ordinal Utility :

When the utility can be measured in quantitative terms it is called cardinal utility whereas when the utility cannot be measured in quantitative terms it is called ordinal utility.

▪ Relationship Between Demand & Utility     
     Of A Commodity :

The quantity of a commodity demanded depends upon its utility.
There is a direct relationship between utility and quantity demanded of a commodity i.e., higher the utility , higher will be the demand for a commodity and lower the utility ,lower will be the demand for a commodity.

▪ Law Of Diminishing Marginal Utility :
First let us understand what is marginal utility
  Marginal utility - utility derived from the consumption of an additional unit is called marginal utility.
Now let us move to The law of diminishing marginal utility.

- The law states that "the additional utility which a person derives from a given increase of his stock of anything diminishes with every increase in the stock that he  already has".
In simple words, when a consumer goes on consuming a particular commodity without any time gap , the additional unit of the same commodity gives him less and less satisfaction.
# the shorter the time period , the more quickly marginal utility diminishes.

HOW CARDINAL AND ORDINAL UTILITY OF PRODUCT IS MEASURED?

In today's world we are dependent on many online applications in our mobile itself. Even many people shifted or started their business through online application in order to save their time and do the work more accurately with small as well as big capital investment. For example HOTSTAR, MAKE MY TRIP, GO-IBIBO, MYNTRA, PAYTM etc. Now measuring the utility which means satisfaction from the products or services they deliver is not express in number form,it is very subjective in nature. For measuring the utility of these product and services they request their customer to rate them or to feel a small feedback form after you installed and visited the applications once or twice.These ratings and feedback forms helps to measure their cardinal utility of product and services. After measuring cardinal utility of the product and services they rank and give position to themselves on the basis of the cardinal utility measurement. These ranking and positioning is measured in form of numbers, it is very objective in nature. Hence these ranking and positioning help to measure their ordinal utility of product and services. Ordinal utility may or may not include process of cardinal utility. this process need to be done in order to measure cardinal utility and ordinal utility of product and services they deliver to their respective customers.