Utility Analysis — Flashcards

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Utility refers to the want-satisfying power of a commodity. It is the satisfaction or benefit a consumer gets from consuming a good or service. Utility is subjective and varies from person to person.

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Cardinal Utility is the approach where utility can be measured in numerical units like 1, 2, 3, etc. It assumes that satisfaction from consuming a good can be expressed quantitatively. For example, an…

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Ordinal Utility is the approach where utility cannot be measured in numbers but can be ranked in order of preference. Consumers compare goods qualitatively, such as preferring coffee over tea. This me…

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Cardinal Utility measures satisfaction in exact numbers (e.g., 10, 20 units), while Ordinal Utility ranks preferences without numbers (e.g., I prefer A over B). Cardinal is quantitative and used by Ma…

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Total Utility is the total satisfaction obtained from consuming all units of a commodity. It increases with consumption but at a diminishing rate. For example, if 3 apples give 30, 50, and 60 units of…

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Marginal Utility is the additional satisfaction gained from consuming one more unit of a good. It is calculated as: MU = ΔTU / ΔQ. For example, if total utility increases from 80 to 110 when the 3rd a…

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When Total Utility increases at a diminishing rate, Marginal Utility decreases. When TU is maximum, MU is zero. When TU starts to fall, MU becomes negative. This shows that as more units are consumed,…

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The Law of Diminishing Marginal Utility states that as a person consumes more units of a good, the additional satisfaction (marginal utility) from each extra unit decreases. For example, the first sli…