Uyility Theories Essay

4737 Words Jul 5th, 2012 19 Pages
Contents
Utility before 1920’s 2
Utility measurements 2
CARDINALIST AND ORDINALIST UTILITY APPROACH OF CONSUMER BEHAVIOUR 3
CARDINALIST UTILITY APPROACH 3
Marginal utility 4
Assumptions of Cardinal Utility Analysis: 5
Cardinal Measurement of Utility 5
Rationality 6
Diminishing marginal utility 6
ORDINALIST UTILITY APPROACH 7
Rational behavior of the consumer 8
Ordinal Utility 8
Diminishing marginal rate of substitution 8
Consistency selection 8
Transitivity/Consumer’s preference is not self-contradictory 8
Goods consumed are substitutable 9
ECONOMIES AND DISECONOMIES OF SCALE 16
ECONOMIES OF SCALE 16
Definition: 16
Internal economies of scale 16
External economies of scale 18
DISECONOMIES OF SCALE 20
Internal
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Consumer choice theory is applied by the consumer by; identifying of the affordable combinations of goods and then choosing the affordable goods that satisfy the most urgent want and postpone the less urgent want.

Utility concept was then developed to provide a basis for dicussing the satisfaction of wants and need derived from consumption as well as an understanding of the role utility plays in market demand. In principle, utility measurement of various goods and services can take one of two forms: Cardinal form which is based on numerical values or Ordinal form which is based on rankings.

CARDINALIST AND ORDINALIST UTILITY APPROACH OF CONSUMER BEHAVIOUR

CARDINALIST UTILITY APPROACH

Jevons, W.S. (1835 -1882) was the first economist who introduces the concept of utility in economics. According to him, "Utility is the basis on which the demand of an individual for a commodity depends upon". Utility can also be defined as the benefit or satisfaction that a person gets from a consumption of a good or commodity. For example, Cloth has a utility for us because we can wear it and so is Pen because we can write with it.
However, utility is subjective in nature for it differs from person to person. For example, the utility of a bottle of wine is zero for a person who is non-drinker while it has a very high utility for a drinker.

Marginal utility: Jevons (1835-1880) developed the concept of

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