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Maharashtra State Board · HSC Commerce · Class 12 (Std XII)

Class 12 Economics Chapter 2: Utility Analysis

Short notes, key concepts, quick revision and practice MCQs with answers

Explains utility, its features and types, the relationship between total and marginal utility, the law of diminishing marginal utility with its assumptions, exceptions and significance, and how marginal utility and price decide consumer equilibrium.

Key concepts: Utility Analysis

Utility
The want-satisfying power of a commodity. It is relative, subjective, ethically neutral and different from usefulness, pleasure and satisfaction.
Types of utility
Form, place, service, knowledge, possession and time utility, depending on how a commodity or service satisfies a want.
Total utility and marginal utility
Total utility is the sum of utility from all units consumed; marginal utility is the extra utility from one more unit. MUn = TUn - TU(n-1).
Point of satiety
The stage where total utility is maximum and marginal utility is zero. Consuming beyond it gives negative marginal utility (disutility).
Law of diminishing marginal utility
As a consumer consumes more units of a commodity, the marginal utility from each successive unit goes on falling, other things remaining constant (Marshall).
Assumptions of the law
Rational consumer, cardinal measurement, homogeneous units, continuous consumption, reasonable size, constancy of related factors, divisibility and a single want.
Exceptions and criticisms
Apparent exceptions are hobbies, a miser, addictions, power and money. Criticised for unrealistic assumptions, cardinal measurement and indivisible goods.
Consumer equilibrium
A rational consumer buys units while MU is greater than price and reaches equilibrium where MU of x equals price of x (MUx = Px).

Quick revision: important points

Practice MCQs with answers

  1. Utility is best described as:

    1. The cost of producing a good
    2. The price paid for a good
    3. The want-satisfying power of a commodity
    4. The quantity of a good available
    Show answer

    Answer: C. The want-satisfying power of a commodity
    Utility is the capacity of a commodity to satisfy a human want.

  2. Woollen clothes have greater utility in winter than in summer. This shows that utility is a ______ concept.

    1. Relative
    2. Absolute
    3. Objective
    4. Fixed
    Show answer

    Answer: A. Relative
    Utility changes with time and place, so it is relative.

  3. Utility differs from person to person because of taste, habits and preferences. Hence utility is:

    1. Objective
    2. Subjective
    3. Constant
    4. Measurable in rupees
    Show answer

    Answer: B. Subjective
    Utility is a psychological concept and therefore subjective.

  4. A knife can be used to cut vegetables as well as to harm someone, yet it has utility in both cases. This shows utility is:

    1. Relative
    2. Subjective
    3. Multi-purpose only
    4. Ethically neutral
    Show answer

    Answer: D. Ethically neutral
    Utility ignores whether a want is good or bad, so it is ethically neutral.

  5. Liquor has utility to an addict but is not useful to him. This shows that:

    1. Utility is different from usefulness
    2. Utility is the same as usefulness
    3. Utility is always negative
    4. Utility depends on price
    Show answer

    Answer: A. Utility is different from usefulness
    A commodity may satisfy a want (utility) without having real value in use (usefulness).

All Class 12 Economics chapters

Class 12 Economics notes: all chapters