Unit-1 Utility analysis | POE|BBA|1st semester 2023

Utility analysis | POE|BBA|1st semester 2023-Hello student, How are all, I have sent you all notes. 10th, 12th, BCA, BBA notes provided in this website . I believe that these will be very helpful notes for you.

Definition Utility analysis

• Utility analysis, a subset of consumer demand theory, provides insight into an understanding of market demand and forms a cornerstone of modern microeconomics. In particular, this analysis investigates consumer behavior, especially market purchases, is based on the satisfaction of wants and need (that is, utility) generated from the consumption of a good.
• Utility analysis is primarily taught in introductory courses. A more sophisticated version of consumer demand theory relies on the analysis of indifference curves and is more commonly found at the intermediate course level and above,

Utility and Satisfaction

• The primary focus of utility analysis is on the satisfaction of wants and needs obtained by the consumption of goods. This is technically termed utility. The utility generated from consumption affects the decision to purchase and consume a good.
• When used in the analysis of consumer behavior, utility assumes a very precise meaning, which differs from the everyday use of the term. In common use, the term utility means “useful.” For example, a “utility” knife is one with many uses, something that is handy to have around. In baseball, a “utility” player can perform quite well at several different positions and is thus useful to have on the team. Moreover, a public “utility” is a company that supplies a useful product, such as electricity, natural gas, or trash collection.
• In contrast, the specific economic use of the term utility in the study of consumer behavior means the satisfaction of wants and needs obtained from the consumption of a commodity. The good consumed need not be “useful” in the everyday sense of the term. It only needs to provide satisfaction.
• In other words, a frivolous good that has little or no practical use, can provide as much utility as a more useful good.

1. An Omni Open Deluxe can Opener is extremely useful, especially when a sealed can needs to be opened.
2. An autographed photo of Brace Brick head, Medical Detective, is not very useful. It does nothing but rest peacefully in a picture frame.

• Both items, however, provide utility. Both items satisfy wants and needs. The autographed photo of Brace Brickhead provides the owner with a warm, fuzzy feeling and a reminder of the time spent enjoying the thrilling exploits of Brace Brickhead, Medical Detective.
  

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The Low of Demand

• The primary focus of utility analysis is an understanding of market demand and the law of demand. The law of demand, which gives rise to a negatively sloped demand curve, is and essential principle underlying market analysis. Modern microeconomic theory, among other topics, is concerned with understanding and explaining the law of demand.
• The explanation of the law of demand using utility analysis is relatively simple. Consumers purchase goods that satisfy wants and needs, that is, generate more utility are more valuable to consumers and thus buyers are willing to pay a higher price. The key to the law of demand is that the utility generated declines as the quantity consumed increases. As such, the demand price that buyers are willing to pay decreases as the quantity demanded increases.

Total Utility

• Utility analysis begins with the total utility derived from the consumption of different quantities of a good. Total utility is simply a measure of the total satisfaction of wants and needs obtained from the consumption or use of a good or service. It is often convenient to present total utility for a range of quantities in a table such as the one displayed to the right.
• Utility analysis is based on the presumption that the amount of utility generated from the consumption of a good can be explicitly measured. The standard hypothetical measurement unit is “utils.”
• Suppose , for example, that Edgar millbottom spends a day riding the Monster Loop Death Plunge roller coaster at the Shady valley Amusement Park, then records the amount of total utility achieved at the end of each ride. The two columns presented in the table measure the number of rides and total utility accumulated by Edger at the end of each ride (in utils).

Example of total utility

1. Before his first ride, Edgar receives no utility. No activity, no utility.
2. Edgar’s first ride generates 11 utile of utility.
3. The total utility generated if Edgar takes 88 rides is 32 utils.
4. Edgar’s utility increases for the first 6 rides, reaching a high of 36 utils, before declining back to 32 utils for the 8^th
5. Presumably Edgar’ utility continue to decline after the 8^th
6. Edger obtains the highest total utility from 6 ides on the roller coaster.

• The motivation that guides Edgar’s roller coaster riding is to maximize utility, that is, to consume the quantity of the good that generates the highest level of uility. In this example, utility is maximized at 6 rides.
• In many situations, however, the consumption of a good faces constraints. Edgar, for example, might face a time constraint because he plans to attend a live concert of the rock-and-roll group, live headless Squirrels, that prevents him form riding more than 5 times.
• In these situation Edgar, as well as other consumers,, might pursue constrained utility maximization.