Utility and Consumer Demand

Hi guys, I hope you're doing well. Now in this video, basically we're going to be discussing how do we measure utility. But hang on a second, why is there a need to measure utility? Now to answer this question, we first need to understand that why are we actually studying the theory of utility and why is it so relevant to our course. Now you guys have already studied previously about demand, you've studied what the demand theory is. And hang on a second, when I talk about demand theory, what comes in your head like? what really pops up. Obviously, there are two aspects to demand theory. First is how much a consumer is going to buy given the changes in price or maybe let's say if his income changes, if its income rises or falls, how is that going to affect his relevant purchase of certain quantity of goods? Or let's say if there's changes in price, how will that affect the, you know, the respective quantity of the goods he buys? So basically, demand, when you're studying demand we're actually trying to analyze or study the consumer behavior because demand is what demand is the willingness and the ability of the consumer to purchase a product and when you say that demand is the willingness and ability to purchase a product an alternative way of saying it would be demand is the consumers willingness and ability to actually pay for a product right so demand is willingness and ability to pay so when you say that demand is willingness and ability to pay how much a consumer will pay you know whether he will pay more or whether he will pay less is actually based on the principles of utility or how much satisfaction he will be actually deriving from that particular product. Or you can say how more or how less the consumer will buy given changes in prices, given changes in incomes or the entire science behind the consumer behavior is actually derived from the principles of utility. So the reason why we are studying utility is because we want to understand or analyze the demand theory and when we say that you want to analyze the demand theory we want to analyze the consumer behavior how does consumer purchase what makes a consumer purchase more or less given changes in price and given changes in incomes right remember we studied in law of demand that if price rises or falls it affects the relevant quantity demanded when price falls quantity demanded rises when price rises quantity demanded falls and we also studied that when incomes rise or falls demand shifts right We have already seen those concepts in our previous you know lessons. Now we have already studied these concepts in our previous grades or previous lessons but how is all of that related to utility? I mean is there really a connection between demand and utility? absolutely yes there is a very deep connection and we will try to establish this connection in this video so do subscribe to my channel and watch this video till the end so guys when we are studying utility our ultimate objective of studying utility is to derive a connection between the utility theory and the theory of demand that is consumer behavior because consumer behavior like i said previously as well is based on the science of the utility theory and our purpose would be our ultimate aim would be to actually transition the concepts of utility theory into deriving a demand curve and ultimately leading to the laws of, you know, the principles and theories that we've already studied in demand curve, that how are they linked to the theory of utility. Okay, so here I've already mentioned that, you know, the demand is a willingness and ability to pay that is how much or how less a consumer buys whether it's given or fixed budget or you know whether it's given price whether he will buy more or less is actually based on the demand theory and this demand theory is actually you know when we say demand theory that is the law of demand or shifts and demand is actually deriving or coming or transitioning the utility theory is transitioning itself into the demand theory and that is why it becomes very important to actually study the utility theory so that we can actually study the consumer behavior so that we can you know further strong our concepts further develop the concepts of our demand theory now first of all very importantly we need to first study if you're studying utility we need to first study how do we measure utility and that is the main ultimate objective of this video how are we actually going to measure the utility are there any relevant standard Are there any relevant measurement tools for measuring utility? Because utility is what? Utility is satisfaction or the happiness that you have derived from consuming a particular product. So how are we going to measure that satisfaction? Is there a way? Yes, there are ways that economists have developed in the past. the past and there are two approaches to measure utility. The first approach is the cardinal approach, the second approach is the ordinal approach. The ordinal approach is the approach on which the indifference curve theory is developed and the cardinal approach is the approach on which the marginal utility theory is actually developed. Now guys as far as the ordinal theory or ordinal approach to measuring utility is concerned I'm going to be covering that in the later on videos but just let me briefly If you want ordinal utility, what is the ordinal approach to measuring utility? The ordinal approach to measuring utility just ranks the utility. Instead of measuring utility in a way that it, instead of giving it a particular measurement number or instead of quantifying it, the ordinal approach to measuring utility will rank the utility in the order of preference. So like I can say that, you know, I prefer certain quantity of oranges over certain quantity of apples. I can say I prefer certain quantity of oranges more than this particular quantity of apples or oranges. So I'm actually kind of ranking the utility in my order of preference that I prefer this over this. And why will I be preferring this over this? Because maybe I'm getting more satisfaction. So you can say that ordinal utility or where you're establishing or where you're ranking utility is more of a mental phenomena or more psychological phenomena instead of measuring utility in numbers, right? And we are going to be now this for this video, not only I'm not going to be going into a lot of detail as far as ordinal utility is concerned, because ordinal utility will then develop itself into the theory of the indifference curve, because this theory of indifference curve is actually developing from these concepts of ordinal utility. But these will be covered in the later videos on the same utility playlist. So just hang on and let and wait till I get over that okay Now what is cardinal utility guys? Cardinal utility is basically measuring utility in terms of numbers. It is quantifying you know utility. It is giving it a number. So when I say that it is giving it a number there are actually two ways. In the past economists have measured utility by giving the utility an imaginary number and I had also discussed this utility of imaginary by giving it an imaginary number that is utils in my previous video as well. So when you say that you are giving utility and imaginary number that imaginary number is called utils. So basically you can say that by consuming a particular one unit of chocolate I am getting 10 utils of satisfaction or you can say by let's say consuming one apple I am getting 20 utils of satisfaction. So one chocolate is giving me 10 utils of satisfaction, one apple is giving me 20 utils of satisfaction. So you are actually giving it an imaginary number. It's like saying that you know I get I get 10 utils of satisfaction or 20 utils of satisfaction but where one util is actually equal to one unit of a satisfaction. Now obviously it has certain limitations and I will come to that but when you are saying that one chocolate is equal to 10 utils of satisfaction and one apple is equal to 20 utils of satisfaction you are actually able to quantify the utility right, you are actually measuring utility in numbers, you are actually attaching a number to it, you are measuring it and you are quantifying it right. And based on this you can also say that apple is giving you twice as much as utility as that of chocolate because chocolate is giving you 10 utils apple is giving 20 utils so you can say that you know apple is giving me twice as much as utility as that of chocolate right so and saying that apple gives you utility that is twice as much of chocolate is only possible guys when you are attaching a number to it and you are attaching an imaginary unit that is utils, it's just an imaginary number that you're attaching because and why are you doing that by the way? Why are you doing? Why are you attaching this imaginary number? Because we want to actually come up with a solution, we want to measure utility. If we can't rank utility, right, so if I was ranking the utility I could have said that, you know, apples is giving me more satisfaction than that of chocolates because here I was ranking, I was prioritizing apples over chocolates. But... in an ordinary utility approach right but since right now that's not my topic of the video I'm focusing more on cardinal so basically when I say that I'm measuring utility through cardinal numbers I'm attaching a number to it quantifiable number to it there's a need to measure utility because I need to know how much you know how much of satisfaction am I actually getting out of the consumption of one chocolate or one apple right so You need to understand that economists who were supporting the idea of cardinal utility did not reject the idea of cardinal utility. They said that okay fine we agree that you know ranking the utility is fine, we understand that you rank the utility, you prioritize it in the order of preference that this gives you more satisfaction than that. We understand that we are not rejecting the idea but we believe the cardinal, the economist who supported the cardinal utility approach said that we believe that utility can also be measured in quantifiable numbers because it needed a measure for that so that you can understand that for instance if let's say if you know if these are if these are two markers and I need to measure the length of this marker and I you know I don't have a scale to measure this length so how am I going to measure this length I have to you know somehow I have to come up with an approach right so I'll measure it like by saying you know this is this must be you know uh equal to I don't know some number and then you know this for this must be equal to 1.5 something I can say you know 1 and then you know 0.5 so I'm actually giving a number to that because I don't have a measurement criteria I'm actually coming up with a solution and measuring it according to a certain criteria and measuring it is important because I need to measure the length of this. Similarly, an economist needed to measure the utility, they needed to measure the satisfaction. So, ranking or preference, so economists who supported this idea said that you know, we are not rejecting your idea of ranking utility in the order of preference, but we think that we believe that you can also measure utility and one way Of some economist, some economist who supported the idea of measuring utility in quantifiable numbers said that utility can be measured in utils. It's just an imaginary number saying that one chocolate gives me 10 utils and one apple gives me 20 utils, right? However, Alfred Marshall, right? Okay, by the way, I've written the spelling wrong. It's Al... Fred Marshall. So, Alfred Marshall, he was a very famous economist. He said, he also, by the way, supported the idea of measuring utility through quantifiable numbers, that is the cardinal utility approach. He said, so Alfred Marshall said that you can measure utility in money terms, right? He said that, you know, because the reason why he said that was because obviously measuring utility in utils is kind of not practical. doesn't kind of make sense so he said that you know alfred marshall said that utility can be measured in money terms and this is this actually quite makes a lot of sense i'll tell you why for example you go to a shop And by the way, when he said that utility can be measured in money terms, it meant that he's attaching a monetary value to utility. And you'll understand what this means. Where utility is equal to the price of the product paid by the consumer. Utility is equal to the price of the product paid by the consumer. What it means, just hold on, let me explain. For example, you go to a shop and you say that you want to buy, let's say, good eggs, right? You want to buy good eggs. So the shopkeeper tells you that good X is worth let's say two thousand dollars and you are like you know this is quite expensive and you can't you think that the shopkeeper is telling you a price that is way too much for this product this this good is according to you is not worth two thousand according to you this is only worth let's say fifteen hundred dollars it's not worth two thousand by any means Now when you are mentally thinking this and evaluating the worth of this product because again, again, this is again linked to consumer behavior. When you are mentally calculating this, you see another consumer who enters the shop and he asks for the same good x. He says how much is it? The shopkeeper tells the same. He says that you know it's worth two thousand dollars. You see that he pays the price two thousand dollars and he leaves. The shopkeeper gets the two thousand dollars and the consumer leaves with the good. and you're seeing this happening right and okay so and assuming assuming that you are this is you and this is Mr. A. So assuming that your income and Mr. A's income is the same. So why is this happening? Both have same incomes. You have a certain amount of income monthly income. He also has the same amount of monthly income than that you have. So we are keeping other factors constant. we're keeping other factors constant so income is constant and he pays two thousand dollars for it but for you you know this good is not worth two thousand you don't want to pay two thousand so don't you think that if so don't you think that two thousand dollars is the price of the product two thousand dollars is the price of the product you don't want to pay two thousand you want to pay fifteen hundred he pays two thousand for it and he leaves both are the same incomes Can't I say that if he pays $2,000 for it, then he must be receiving at least $2,000 worth of utility? Because for him, if he's paying $2,000, we can say that he's getting a satisfaction that is equivalent to $2,000 at least. Isn't it? So haven't I measured utility in quantifiable numbers? Haven't I attached a value to it? Haven't I attached a number to it? That is what cardinal utility is. And Alfred Marshall actually said that you can measure utility in money terms where utility, the amount of utility that you will get from the consumption of a product is actually equal to the price of the product that you're paying for it. If I buy a marker for let's say $10 and I want to say, so by the way, why have I paid $10 for it? If I didn't like the marker, I didn't want to buy this marker for $10, then I shouldn't have paid $10. If I'm paying $10 for it, it means that I'm going to be getting a utility of $10 for it. That is why I paid for it, right? So having said that it actually kind of makes perfect sense this is actually perfect sense and ultimately you'll see that in my coming videos I'll link all these concepts and I'll bring you all to the theory of demand and you'll see how the theory of demand is actually consumer behavior. I'm actually repeating it 3-4 times in this video. I understand I'm repeating it a lot. But there's a reason why I'm repeating it because a lot of students at times students don't even understand that why are we studying utility? Why are we studying demand? Why we are deriving the demand curve from the marginal utility concepts? What's the reason behind it? There is a big reason. So when you're saying that you missed you are so you don't want to pay 2000 for it. You want to pay 1500. So if you want to pay 1500. You're like, so when the other person leaves, Mr. A leaves, you tell this, you bargain with the shopkeeper. You're like, you know what, just reduce the price of the product. The shopkeeper says no, but you're like, please, please reduce it. The shopkeeper agrees and you buy the product for $1500. You buy the product for $1500, he bought the product for $2000, both paid different prices. So for you, you're getting for the same product, the same quality, the same incomes. you're getting a utility for 15 that is worth fifteen hundred dollars Or you can say that you are receiving a utility which is $1500, isn't it? So, can't I say that your marginal utility for the consumption of this product that is GoodX is $1500? Your utility for the product for the consumption of GoodX is $1500. Similarly, for you, this is for you. And the marginal utility for Mr. A is also worth $1500. Sorry, is worth $2000. So, for him it's $2000, for you it's $1500. Make sense? So what I'm gonna say is that marginal utility is basically the marginal utility is when you're measuring marginal utility in money terms so you're actually the price of the product becomes your marginal utility that the price you pay for the product is your marginal utility. And this is the cardinal utility approach. The ordinal utility approach will be ranking utility in the order of preference and then the theory of indifference curve will be developed on the ordinal approach to utility. And the cardinal approach to utility is basically studying consumer behavior through the marginal utility approach. And the marginal utility approach of consumer behavior is measuring utility in cardinal numbers. understood And the consumer behavior and when we are analyzing consumer behavior through the indifference curve approach, which we will study in the later videos, that is actually measuring utility through the ordinal utility approach. That is, it's ranking utility instead of measuring it in numbers. Okay, I'll just raise the boat and I'll explain something further. Okay, guys, I'm back. So for example, if you're measuring utility in money terms, if you're measuring utility in money terms at Alfred Marshall. the concept where the marginal utility is actually equal to the price that you are paying for the product. The marginal utility is actually equal to the price that you are paying for the product and it makes kind of sense like I said that Mr. A he gave how much? He paid $2000 so we can say that he is receiving a utility that is worth $2000. And since money is measurable, so obviously you're actually able to quantify utility if you're measuring it in terms of money. And you, you paid $1500 for it. So you can say that you're receiving a utility of $1500. So guys, remember now one thing very carefully. From now onwards, until we reach the ordinal utility approach, basically when we are going to be developing the entire. demand theory based on the marginal utility theory we are going to be measuring utility in money terms. So now forget the utils approach right that was just an imaginary number and that doesn't kind of make practical sense. So that is why from now onwards we are going to be building the utility theory based on the Alfred Marshall approach where he said that utility is basically measured in terms of the price you're paying for the good and that is why the entire utility theory from this video onwards till all my remaining videos that i will be putting in the utility playlist will be based on until i reach ordinal will be based on the the fact that i'm going to be measuring utility based on money right that is based on the price of the product so from now onward we're going to to be measuring utility in terms of how much we pay for that product. And having said that, whatever price we pay for the product actually becomes our actually becomes the value or the amount of satisfaction that we have received. If I buy this for $2, it gives me a satisfaction of $2. That is why I have paid $2 for it. So this is it, guys. I hope you all enjoyed the video. I'll see you all around in the next video. Until then, take care.

Hi guys, I hope you're doing well. Now in this video, basically we're going to be discussing how do we measure utility. But hang on a second, why is there a need to measure utility?

Now to answer this question, we first need to understand that why are we actually studying the theory of utility and why is it so relevant to our course. Now you guys have already studied previously about demand, you've studied what the demand theory is. And hang on a second, when I talk about demand theory, what comes in your head like? what really pops up.

Obviously, there are two aspects to demand theory. First is how much a consumer is going to buy given the changes in price or maybe let's say if his income changes, if its income rises or falls, how is that going to affect his relevant purchase of certain quantity of goods? Or let's say if there's changes in price, how will that affect the, you know, the respective quantity of the goods he buys? So basically, demand, when you're studying demand we're actually trying to analyze or study the consumer behavior because demand is what demand is the willingness and the ability of the consumer to purchase a product and when you say that demand is the willingness and ability to purchase a product an alternative way of saying it would be demand is the consumers willingness and ability to actually pay for a product right so demand is willingness and ability to pay so when you say that demand is willingness and ability to pay how much a consumer will pay you know whether he will pay more or whether he will pay less is actually based on the principles of utility or how much satisfaction he will be actually deriving from that particular product. Or you can say how more or how less the consumer will buy given changes in prices, given changes in incomes or the entire science behind the consumer behavior is actually derived from the principles of utility.

So the reason why we are studying utility is because we want to understand or analyze the demand theory and when we say that you want to analyze the demand theory we want to analyze the consumer behavior how does consumer purchase what makes a consumer purchase more or less given changes in price and given changes in incomes right remember we studied in law of demand that if price rises or falls it affects the relevant quantity demanded when price falls quantity demanded rises when price rises quantity demanded falls and we also studied that when incomes rise or falls demand shifts right We have already seen those concepts in our previous you know lessons. Now we have already studied these concepts in our previous grades or previous lessons but how is all of that related to utility? I mean is there really a connection between demand and utility?

absolutely yes there is a very deep connection and we will try to establish this connection in this video so do subscribe to my channel and watch this video till the end so guys when we are studying utility our ultimate objective of studying utility is to derive a connection between the utility theory and the theory of demand that is consumer behavior because consumer behavior like i said previously as well is based on the science of the utility theory and our purpose would be our ultimate aim would be to actually transition the concepts of utility theory into deriving a demand curve and ultimately leading to the laws of, you know, the principles and theories that we've already studied in demand curve, that how are they linked to the theory of utility. Okay, so here I've already mentioned that, you know, the demand is a willingness and ability to pay that is how much or how less a consumer buys whether it's given or fixed budget or you know whether it's given price whether he will buy more or less is actually based on the demand theory and this demand theory is actually you know when we say demand theory that is the law of demand or shifts and demand is actually deriving or coming or transitioning the utility theory is transitioning itself into the demand theory and that is why it becomes very important to actually study the utility theory so that we can actually study the consumer behavior so that we can you know further strong our concepts further develop the concepts of our demand theory now first of all very importantly we need to first study if you're studying utility we need to first study how do we measure utility and that is the main ultimate objective of this video how are we actually going to measure the utility are there any relevant standard Are there any relevant measurement tools for measuring utility? Because utility is what?

Utility is satisfaction or the happiness that you have derived from consuming a particular product. So how are we going to measure that satisfaction? Is there a way?

Yes, there are ways that economists have developed in the past. the past and there are two approaches to measure utility. The first approach is the cardinal approach, the second approach is the ordinal approach. The ordinal approach is the approach on which the indifference curve theory is developed and the cardinal approach is the approach on which the marginal utility theory is actually developed. Now guys as far as the ordinal theory or ordinal approach to measuring utility is concerned I'm going to be covering that in the later on videos but just let me briefly If you want ordinal utility, what is the ordinal approach to measuring utility?

The ordinal approach to measuring utility just ranks the utility. Instead of measuring utility in a way that it, instead of giving it a particular measurement number or instead of quantifying it, the ordinal approach to measuring utility will rank the utility in the order of preference. So like I can say that, you know, I prefer certain quantity of oranges over certain quantity of apples. I can say I prefer certain quantity of oranges more than this particular quantity of apples or oranges. So I'm actually kind of ranking the utility in my order of preference that I prefer this over this.

And why will I be preferring this over this? Because maybe I'm getting more satisfaction. So you can say that ordinal utility or where you're establishing or where you're ranking utility is more of a mental phenomena or more psychological phenomena instead of measuring utility in numbers, right?

And we are going to be now this for this video, not only I'm not going to be going into a lot of detail as far as ordinal utility is concerned, because ordinal utility will then develop itself into the theory of the indifference curve, because this theory of indifference curve is actually developing from these concepts of ordinal utility. But these will be covered in the later videos on the same utility playlist. So just hang on and let and wait till I get over that okay Now what is cardinal utility guys? Cardinal utility is basically measuring utility in terms of numbers. It is quantifying you know utility.

It is giving it a number. So when I say that it is giving it a number there are actually two ways. In the past economists have measured utility by giving the utility an imaginary number and I had also discussed this utility of imaginary by giving it an imaginary number that is utils in my previous video as well. So when you say that you are giving utility and imaginary number that imaginary number is called utils.

So basically you can say that by consuming a particular one unit of chocolate I am getting 10 utils of satisfaction or you can say by let's say consuming one apple I am getting 20 utils of satisfaction. So one chocolate is giving me 10 utils of satisfaction, one apple is giving me 20 utils of satisfaction. So you are actually giving it an imaginary number. It's like saying that you know I get I get 10 utils of satisfaction or 20 utils of satisfaction but where one util is actually equal to one unit of a satisfaction.

Now obviously it has certain limitations and I will come to that but when you are saying that one chocolate is equal to 10 utils of satisfaction and one apple is equal to 20 utils of satisfaction you are actually able to quantify the utility right, you are actually measuring utility in numbers, you are actually attaching a number to it, you are measuring it and you are quantifying it right. And based on this you can also say that apple is giving you twice as much as utility as that of chocolate because chocolate is giving you 10 utils apple is giving 20 utils so you can say that you know apple is giving me twice as much as utility as that of chocolate right so and saying that apple gives you utility that is twice as much of chocolate is only possible guys when you are attaching a number to it and you are attaching an imaginary unit that is utils, it's just an imaginary number that you're attaching because and why are you doing that by the way? Why are you doing? Why are you attaching this imaginary number?

Because we want to actually come up with a solution, we want to measure utility. If we can't rank utility, right, so if I was ranking the utility I could have said that, you know, apples is giving me more satisfaction than that of chocolates because here I was ranking, I was prioritizing apples over chocolates. But... in an ordinary utility approach right but since right now that's not my topic of the video I'm focusing more on cardinal so basically when I say that I'm measuring utility through cardinal numbers I'm attaching a number to it quantifiable number to it there's a need to measure utility because I need to know how much you know how much of satisfaction am I actually getting out of the consumption of one chocolate or one apple right so You need to understand that economists who were supporting the idea of cardinal utility did not reject the idea of cardinal utility.

They said that okay fine we agree that you know ranking the utility is fine, we understand that you rank the utility, you prioritize it in the order of preference that this gives you more satisfaction than that. We understand that we are not rejecting the idea but we believe the cardinal, the economist who supported the cardinal utility approach said that we believe that utility can also be measured in quantifiable numbers because it needed a measure for that so that you can understand that for instance if let's say if you know if these are if these are two markers and I need to measure the length of this marker and I you know I don't have a scale to measure this length so how am I going to measure this length I have to you know somehow I have to come up with an approach right so I'll measure it like by saying you know this is this must be you know uh equal to I don't know some number and then you know this for this must be equal to 1.5 something I can say you know 1 and then you know 0.5 so I'm actually giving a number to that because I don't have a measurement criteria I'm actually coming up with a solution and measuring it according to a certain criteria and measuring it is important because I need to measure the length of this. Similarly, an economist needed to measure the utility, they needed to measure the satisfaction.

So, ranking or preference, so economists who supported this idea said that you know, we are not rejecting your idea of ranking utility in the order of preference, but we think that we believe that you can also measure utility and one way Of some economist, some economist who supported the idea of measuring utility in quantifiable numbers said that utility can be measured in utils. It's just an imaginary number saying that one chocolate gives me 10 utils and one apple gives me 20 utils, right? However, Alfred Marshall, right? Okay, by the way, I've written the spelling wrong. It's Al...

Fred Marshall. So, Alfred Marshall, he was a very famous economist. He said, he also, by the way, supported the idea of measuring utility through quantifiable numbers, that is the cardinal utility approach.

He said, so Alfred Marshall said that you can measure utility in money terms, right? He said that, you know, because the reason why he said that was because obviously measuring utility in utils is kind of not practical. doesn't kind of make sense so he said that you know alfred marshall said that utility can be measured in money terms and this is this actually quite makes a lot of sense i'll tell you why for example you go to a shop And by the way, when he said that utility can be measured in money terms, it meant that he's attaching a monetary value to utility.

And you'll understand what this means. Where utility is equal to the price of the product paid by the consumer. Utility is equal to the price of the product paid by the consumer. What it means, just hold on, let me explain.

For example, you go to a shop and you say that you want to buy, let's say, good eggs, right? You want to buy good eggs. So the shopkeeper tells you that good X is worth let's say two thousand dollars and you are like you know this is quite expensive and you can't you think that the shopkeeper is telling you a price that is way too much for this product this this good is according to you is not worth two thousand according to you this is only worth let's say fifteen hundred dollars it's not worth two thousand by any means Now when you are mentally thinking this and evaluating the worth of this product because again, again, this is again linked to consumer behavior.

When you are mentally calculating this, you see another consumer who enters the shop and he asks for the same good x. He says how much is it? The shopkeeper tells the same. He says that you know it's worth two thousand dollars. You see that he pays the price two thousand dollars and he leaves.

The shopkeeper gets the two thousand dollars and the consumer leaves with the good. and you're seeing this happening right and okay so and assuming assuming that you are this is you and this is Mr. A. So assuming that your income and Mr. A's income is the same. So why is this happening? Both have same incomes.

You have a certain amount of income monthly income. He also has the same amount of monthly income than that you have. So we are keeping other factors constant. we're keeping other factors constant so income is constant and he pays two thousand dollars for it but for you you know this good is not worth two thousand you don't want to pay two thousand so don't you think that if so don't you think that two thousand dollars is the price of the product two thousand dollars is the price of the product you don't want to pay two thousand you want to pay fifteen hundred he pays two thousand for it and he leaves both are the same incomes Can't I say that if he pays $2,000 for it, then he must be receiving at least $2,000 worth of utility? Because for him, if he's paying $2,000, we can say that he's getting a satisfaction that is equivalent to $2,000 at least.

Isn't it? So haven't I measured utility in quantifiable numbers? Haven't I attached a value to it?

Haven't I attached a number to it? That is what cardinal utility is. And Alfred Marshall actually said that you can measure utility in money terms where utility, the amount of utility that you will get from the consumption of a product is actually equal to the price of the product that you're paying for it.

If I buy a marker for let's say $10 and I want to say, so by the way, why have I paid $10 for it? If I didn't like the marker, I didn't want to buy this marker for $10, then I shouldn't have paid $10. If I'm paying $10 for it, it means that I'm going to be getting a utility of $10 for it.

That is why I paid for it, right? So having said that it actually kind of makes perfect sense this is actually perfect sense and ultimately you'll see that in my coming videos I'll link all these concepts and I'll bring you all to the theory of demand and you'll see how the theory of demand is actually consumer behavior. I'm actually repeating it 3-4 times in this video. I understand I'm repeating it a lot.

But there's a reason why I'm repeating it because a lot of students at times students don't even understand that why are we studying utility? Why are we studying demand? Why we are deriving the demand curve from the marginal utility concepts?

What's the reason behind it? There is a big reason. So when you're saying that you missed you are so you don't want to pay 2000 for it.

You want to pay 1500. So if you want to pay 1500. You're like, so when the other person leaves, Mr. A leaves, you tell this, you bargain with the shopkeeper. You're like, you know what, just reduce the price of the product. The shopkeeper says no, but you're like, please, please reduce it. The shopkeeper agrees and you buy the product for $1500. You buy the product for $1500, he bought the product for $2000, both paid different prices.

So for you, you're getting for the same product, the same quality, the same incomes. you're getting a utility for 15 that is worth fifteen hundred dollars Or you can say that you are receiving a utility which is $1500, isn't it? So, can't I say that your marginal utility for the consumption of this product that is GoodX is $1500? Your utility for the product for the consumption of GoodX is $1500.

Similarly, for you, this is for you. And the marginal utility for Mr. A is also worth $1500. Sorry, is worth $2000. So, for him it's $2000, for you it's $1500. Make sense?

So what I'm gonna say is that marginal utility is basically the marginal utility is when you're measuring marginal utility in money terms so you're actually the price of the product becomes your marginal utility that the price you pay for the product is your marginal utility. And this is the cardinal utility approach. The ordinal utility approach will be ranking utility in the order of preference and then the theory of indifference curve will be developed on the ordinal approach to utility. And the cardinal approach to utility is basically studying consumer behavior through the marginal utility approach. And the marginal utility approach of consumer behavior is measuring utility in cardinal numbers.

understood And the consumer behavior and when we are analyzing consumer behavior through the indifference curve approach, which we will study in the later videos, that is actually measuring utility through the ordinal utility approach. That is, it's ranking utility instead of measuring it in numbers. Okay, I'll just raise the boat and I'll explain something further. Okay, guys, I'm back.

So for example, if you're measuring utility in money terms, if you're measuring utility in money terms at Alfred Marshall. the concept where the marginal utility is actually equal to the price that you are paying for the product. The marginal utility is actually equal to the price that you are paying for the product and it makes kind of sense like I said that Mr. A he gave how much?

He paid $2000 so we can say that he is receiving a utility that is worth $2000. And since money is measurable, so obviously you're actually able to quantify utility if you're measuring it in terms of money. And you, you paid $1500 for it. So you can say that you're receiving a utility of $1500.

So guys, remember now one thing very carefully. From now onwards, until we reach the ordinal utility approach, basically when we are going to be developing the entire. demand theory based on the marginal utility theory we are going to be measuring utility in money terms.

So now forget the utils approach right that was just an imaginary number and that doesn't kind of make practical sense. So that is why from now onwards we are going to be building the utility theory based on the Alfred Marshall approach where he said that utility is basically measured in terms of the price you're paying for the good and that is why the entire utility theory from this video onwards till all my remaining videos that i will be putting in the utility playlist will be based on until i reach ordinal will be based on the the fact that i'm going to be measuring utility based on money right that is based on the price of the product so from now onward we're going to to be measuring utility in terms of how much we pay for that product. And having said that, whatever price we pay for the product actually becomes our actually becomes the value or the amount of satisfaction that we have received.

If I buy this for $2, it gives me a satisfaction of $2. That is why I have paid $2 for it. So this is it, guys.

I hope you all enjoyed the video. I'll see you all around in the next video. Until then, take care.

Transcript for:Utility and Consumer Demand

Transcript for:
Utility and Consumer Demand