1. Utility
Utility is the want-satisfying power of a good. In the cardinal approach it is assumed measurable in utils, and in money when the MU of money is constant.
- Subjective: depends on the consumer's desire.
- Ethically neutral: a good need not be useful or healthy to have utility.
- Relative: varies with time, place and person.
Key terms
- Utility
The capacity of a good to satisfy a human want.
- Util
An imaginary unit used to count utility in the cardinal approach.
2. Total and marginal utility
TU = satisfaction from all units consumed = sum of MUs. MU = change in TU from one more unit: MUₙ = TUₙ − TUₙ₋₁.
Relationship: MU positive and falling → TU rises at a diminishing rate; MU = 0 → TU maximum (point of satiety); MU negative → TU falls. In a diagram the MU curve cuts the x-axis at the quantity where the TU curve peaks.
| Plates | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| TU (utils) | 20 | 36 | 48 | 56 | 60 | 60 | 56 |
| MU (utils) | 20 | 16 | 12 | 8 | 4 | 0 | -4 |
Key terms
- Total utility
The sum of satisfaction from all units of a good consumed.
- Marginal utility
The addition to total utility from one more unit.
- Point of satiety
The quantity at which MU is zero and TU is maximum.
3. Law of Diminishing Marginal Utility
Statement: other things remaining the same, as a consumer consumes more and more units of a good in succession, the marginal utility of each successive unit diminishes.
Why: a want is limited in intensity; the first unit satisfies much of it, so later units add less.
Assumptions: cardinal measurement; continuous consumption; homogeneous units; constant income, tastes and MU of money; a rational consumer. (Criticisms of the law are not in the ISC 2027 syllabus.)
| Assumption | Meaning |
|---|---|
| Cardinal measurement | Utility can be counted in utils and expressed in money |
| Continuous consumption | Units are taken one after another without a long gap |
| Homogeneous units | Every unit is identical in size, quality and taste |
| Ceteris paribus | Income, tastes, habits and the MU of money stay constant |
| Rational consumer | The consumer aims at maximum satisfaction |
| Situation (imagined Kohima school) | Law applies? | Assumption |
|---|---|---|
| Four glasses of water after a match | Yes | Continuous, identical units |
| A novel today, the sequel in six months | No | Time gap; units differ |
| A small laddoo, then a very large one | No | Units not homogeneous |
Key terms
- Ceteris paribus
Other things (income, tastes, prices of other goods) remaining the same.
- Homogeneous units
Units identical in size, quality and taste.
4. Consumer's equilibrium: one commodity
Condition: MUx = Px (MU in rupees), with MU falling.
- If MU > P: buying more adds more satisfaction than the money given up — buy more.
- If MU < P: the last unit is worth less than its price — buy less.
As the price falls, the consumer buys more units (because MU diminishes): this is how the condition explains the downward-sloping demand curve.
| Glass | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| MU (₹) | 70 | 50 | 30 | 10 | -10 |
| Buy at ₹30? | Yes | Yes | Yes | No | No |
| Price of lassi (₹) | 70 | 50 | 30 | 10 |
|---|---|---|---|---|
| Glasses bought | 1 | 2 | 3 | 4 |
Key terms
- Consumer's equilibrium
The position in which a consumer gets maximum satisfaction from her money and has no reason to change her purchases.
- Marginal utility of money
The utility of the last rupee held; assumed constant.
5. Law of Equimarginal Utility (two commodities)
Statement: a consumer with limited income gets maximum satisfaction when she spends it so that the marginal utility of the last rupee is equal in all uses.
Condition: MUx ÷ Px = MUy ÷ Py = MUm, with the whole income spent.
Adjustment: if MUx ÷ Px > MUy ÷ Py, transfer rupees from Y to X; diminishing MU then lowers MUx and raises MUy until the ratios are equal.
Also called the law of maximum satisfaction or the law of substitution.
| Unit | 1 | 2 | 3 | 4 | 5 | 6 |
|---|---|---|---|---|---|---|
| Toffee MU (₹2 each) | 20 | 16 | 12 | 10 | 8 | 6 |
| Toffee MU ÷ P | 10 | 8 | 6 | 5 | 4 | 3 |
| Balloon MU (₹4 each) | 40 | 32 | 24 | 16 | 12 | 8 |
| Balloon MU ÷ P | 10 | 8 | 6 | 4 | 3 | 2 |
| Assumption | Meaning |
|---|---|
| Limited income | A fixed sum to spend on many wants |
| Given prices | Prices of goods do not change during the choice |
| Constant MU of money | Each rupee has the same utility |
| Diminishing MU | Each good obeys the Law of Diminishing Marginal Utility |
| Rational consumer | Aims at maximum satisfaction |
Key terms
- Law of Equimarginal Utility
Maximum satisfaction is reached when the marginal utility per rupee is equal in every use of income.
- MU per rupee
Marginal utility of a good divided by its price.
6. Price changes and demand
A rise in the price of X lowers MUx ÷ Px, so the consumer buys less X (and more Y) until the ratios are equal again; a fall in price does the opposite. Both the one-good and the two-good conditions therefore explain the law of demand.
| Comics (₹5) | Puzzle books (₹10) | |
|---|---|---|
| MU ÷ P of units 1 to 4 | 10, 9, 8, 7 | 12, 10, 8, 6 |
| Equilibrium with ₹45 | 3 | 3 |
| If comics cost ₹10: MU ÷ P of the 3rd comic | 4 | 8 (3rd book) |
Key terms
- Law of demand
Other things remaining the same, quantity demanded falls as price rises.
Exam tips
Common mistakes
- Writing MU = TU ÷ quantity (that is average utility).
- Saying TU falls whenever MU falls — TU falls only when MU is negative.
- Stating the two-good condition as MUx = MUy, or as equal spending on each good.
- Leaving out "income fully spent" from the condition.
- Writing criticisms of the Law of Diminishing Marginal Utility — only its assumptions are in the ISC 2027 syllabus.
How marks are usually awarded
- 1-mark MCQ / assertion-reason: one correct option.
- 2 marks: a definition or condition plus a reason or example.
- 3 marks: three steps or points; numericals show the formula, working and answer.
- 5 marks (and the ISC paper's 4- and 8-mark parts): a schedule or diagram with a full explanation, each part answered separately.