2.1.ppt- Cardinal Utility Approach in Business Eco

Cardinal Utility Approach in Business Eco

1. BUSINESS ECONOMICS
107
UNIT- 2
Faculty Name: Dr. Shuchi Singhal
Designation: Associate Professor
School/Dept: Management
Email address of Faculty Member: [email protected]

2. Programme Outcomes
2
PO1: Apply knowledge of various functional areas of business
PO2: Develop communication and professional presentation skills
PO3: Demonstrate critical thinking and Analytical skills for business
decision making
PO4: Illustrate leadership abilities to make effective and productive
teams
PO5: Explore the implications and understanding of the process of
starting a new venture
PO6: Imbibe responsible citizenship towards a sustainable society
and ecological environment
PO7: Appreciate inclusivity towards diverse cultures and imbibe
universal values
PO8: Foster Creative thinking to find innovative solutions for
various business situations

3. Course Objective and Course Outcomes
3
CO1:Understand the fundamental concepts of Business
Economics.
CO2:Analyze the relationship between consumer behaviour
and demand.
CO3:Explore the theory of production through the use of
ISO-QUANTS.
CO4:Understand the concept and relevance of short-term
and long-term cost.
CO5:Examine pricing decisions under various market
conditions.
CO6:Analyse economic challenges posed to businesses

4. Syllabus

5. Consumer Behavior and Demand
Analysis
2.1 CARDINAL UTILITY APPROACH: DIMINISHING MARGINAL UTILITY
2.2 CARDINAL UTILITY APPROACH: LAW OF EQUI- MARGINAL UTILITY
2.3 ORDINAL UTILITY APPROACH: INDIFFERENCE CURVES-Part 1
2.4 ORDINAL UTILITY APPROACH: INDIFFERENCE CURVES-Part 2
2.5 MARGINAL RATE OF SUBSTITUTION
2.6 BUDGET LINE AND CONSUMER EQUILIBRIUM
2.7 THEORY OF DEMAND
2.8 LAW OF DEMAND
2.9 MOVEMENT ALONG VS. SHIFT IN DEMAND CURVE
2.10 CONCEPT OF MEASUREMENT OF ELASTICITY OF DEMAND
2.11 FACTORS AFFECTING ELASTICITY OF DEMAND
2.12 INCOME ELASTICITY OF DEMAND, CROSS ELASTICITY OF DEMAND,
ADVERTISING ELASTICITY OF DEMAND
2.13 DEMAND FORECASTING: NEED, OBJECTIVE AND METHODS IN BRIEF
By: Shuchi Goel 5

6. 2.1
•Cardinalist
Approach
•Law of Diminishing
Marginal Utility
•Equilibrium of the
Consumer
6

7. 2.1 CARDINAL
UTILITY
APPROACH:
DIMINISHING
MARGINAL UTILITY
By: Shuchi Goel 7

8. Suggested Readings
Author: A. Koutsoyiannis
Title of the Book: Modern Micro Economics
Chapter’s Name: Theory of Demand
Author: Paul A. Samuelson & William D. Nordhaus
Title of the Book: Economics
Chapter’s Name: Demand and Consumer Behaviour
https://corporatefinanceinstitute.com/resources/knowledge/economics/law-of-diminishing-margina
l-utility
/

By: Shuchi Goel 8

9. 2.1 CARDINAL UTILITY
APPROACH: DIMINISHING
MARGINAL UTILITY
Cardinal Utility Approach
Introduction:
•To describe the way consumers choose among different consumption
possibilities, economists developed the notion of ‘utility’.
•The consumer is assumed to be rational.
By: Shuchi Goel 9

10. •There are two basic approaches to the problem of comparison of utilities- the
Cardinalist approach and the Ordinalist approach.
Cardinalist Approach:
•The cardinalist school postulated that utility can be measured.
•Utility can be measured in monetary units, by the amount of money the
consumer is willing to sacrifice for another unit of a commodity.
•The measurement of utility may also be in subjective units, called utils.
By: Shuchi Goel 10

11. Assumptions of Cardinal Utility Theory:
1.Rationality
2.Cardinal Utility
3.Constant Marginal Utility of Money.
4.Diminishing Marginal Utility
By: Shuchi Goel 11

12. Marginal Utility and the Law of Diminishing Marginal Utility:
•The term ‘Marginal’ means ‘additional’ or ‘extra’. Marginal utility denotes
the additional utility you get from the consumption of an additional unit of a
commodity.
By: Shuchi Goel 12

13. ‘The law of diminishing marginal utility states that, as the amount of a good
consumed increases, the marginal utility of that good tends to decline.’
By: Shuchi Goel 13

14. Total Utility (TU):
TU
n
= MU
1
+ MU
2
+ MU
3
+……+ Mu
n
Marginal Utility (MU):
MU
n
= TU
n
– Tu
n-1
Average Utility (AU):
AU = TU/Q
By: Shuchi Goel 14

15. Conclusion
•The cardinalist school postulated that utility can be measured.
•Utility can be measured in monetary units, by the amount of money the consumer is
willing to sacrifice for another unit of a commodity.
•The law of diminishing marginal utility states that, as the amount of a good
consumed increases, the marginal utility of that good tends to decline.
•Thus, consumer is in equilibrium when the Marginal Utility of X is equated to the
its Market Price (P
x
).
By: Shuchi Goel 15