Chapter 2: Utility Analysis Flashcards

Vocabulary flashcards covering key terms, types, features, assumptions, and concepts of Utility Analysis and the Law of Diminishing Marginal Utility.

Utility

The want satisfying capacity of a commodity.

Relative Concept

A feature of utility indicating that it varies from time to time and place to place.

Subjective Concept

A feature of utility indicating that it varies from person to person.

Form Utility

Utility created by changing the shape, structure, or size of a commodity.

Place Utility

Utility created by changing the place of use of a commodity.

Time Utility

Utility created by changing the time of use of a commodity.

Service Utility

Utility created through the transfer of services.

Knowledge Utility

Utility created through the transfer of knowledge.

Possession Utility

Utility created through the transfer of ownership.

Law of Diminishing Marginal Utility (DMU)

A law stated by Prof. Alfred Marshall: 'Other things remaining constant, the additional benefit which a person derives from a given increase in his stock of a thing, diminishes with every increase in the stock that he already has.'

Point of Satiety

The point of consumption where Marginal Utility ($MU$) becomes zero, where the $MU$ curve cuts the X-axis.

Total Utility (TU)

The aggregate of utility derived by the consumer from all units of a commodity consumed.

Marginal Utility (MU)

The additional utility derived by a consumer from an additional unit of a commodity consumed.

Rationality

An assumption of the Law of DMU that the person consuming the commodity is rational.

Cardinal Measurement

An assumption of the Law of DMU that utility units can be measured in numbers.

Homogeneity

An assumption of the Law of DMU that all units of a commodity consumed should be identical in size, shape, and colour.

Continuity

An assumption of the Law of DMU that units of a commodity are consumed continuously one after the other.

Constancy

An assumption of the Law of DMU that consumer taste, habit, and preference remain unchanged during consumption.

Divisibility

An assumption of the Law of DMU that a unit of a commodity should be divisible into small parts.