1. Utility theory
Utility is defined as want satisfying power of the commodity.
Marginal Utility- Increase in the total utility as a result of consumption of additional unit of commodity.
MUn = TUn – TUn-1 MU = TU/Q
Total Utility – Sum of the utilities an individual derives from the total consumption of his commodity
TU n = U1 + U2 + U3 +………… Un 80

2. Approaches to measurement of utility-
Cardinal Utility approach
Ordinal Utility approach
Indifference Curve Approach
Revealed Preference Hypothesis 81

3. CARDINAL UTILITY APPROACH
Utility can be measured in monetary units by the amount of money consumer is ready to sacrifice for another unit of commodity.
Measurement of utility can be done in subjective unit called utils 82

4. ORDINAL UTILITY APPROACH
The utility is not measurable.
Consumer should be able to determine the order of preferences among different bundle of goods.
Consumer need not know in specific units the utility of various commodity to know his preferences. 83

5. CARDINAL - Assumptions
Rationality
Cardinal Utility
Diminishing Marginal Utility
Constant Utility of Money
Utility is additive 84

6. Consumer Equilibrium
When a consumer pays price for the commodity he is consuming, he compares the utility he derives from the additional unit of commodity with the utility he sacrifices in terms of price paid for the unit of commodity
MU = P
In case there are more than two commodities the equilibrium condition may be expresses as 85

7. 86

8. Criticism of Cardinal Approach
Satisfaction derived from various commodities cannot be measured objectively
Money used for measurement is not correct as it is not constant and the value of money keeps fluctuating.
It is psychological concept, therefore the very law is questionable.
The cardinal approach considers the effect of price changes on the demand curve ( price effect). This assumption is unrealistic as the price effect may include income and substitution effect 87

9. Ordinal Utility Approach- assumptions
Rationality
Utility is Ordinal
Diminishing Marginal Rate of Substitution
The total utility of the consumer depends on the quantity of the commodity consumed i.e.
U=f (q1 q2 ….qn)
Consistency and transitivity of choice
Non satiety 88

10. Indifference Curve
An indifference curve may be defined as the locus of points giving particular combination or bundle of goods which yield the same utility or level of satisfaction to the consumer so that he is indifferent as to the particular combination he consumes. 89

11. 90

12. Indifference Curve Map
A number of indifference curves representing various levels if satisfaction form an indifference map 91

13. Properties of Indifference Curve
Indifference curve have negative slope
Indifference Curve are Convex to Origin
Indifference cannot touch or Intersect each other
Higher Level of Indifference Curve Represents Higher Level of Satisfaction 92

14. DIFFERENT SHAPE OF INDIFFERENCE CURVE
Perfect Substitutes Perfect Complimentary 93

15. Consumer Equilibrium
Budget Constraint-Income acts as a constraint in the attempt for maximizing utility and is known as budget constraint.
Y = px qx+ py q y 94

16. 95

17. 96

18. Two conditions must be fulfilled for the consumer to be in equilibrium
Scope of Indifference Curve (MRS) should be equal to the slope of budget line
At the point of consumer equilibrium, indifference curve is convex to the origin, i.e. MRS is diminishing 97

19. Derivation of Demand Curve Using IC Approach
Budget line shifts
New Equilibrium
(E2)
Point of Tangency of
BLS & Higher IC
(Price Consumption
Curve)
Join successive points
On QY axis to get DD 98

20. Derivation of Demand Curve Using IC Approach
Change in the consumption basket as a result of Changes in price is called price effect.
The total price effect comprises of two components
(a) substitution effect
(b) income Effect 99

21. When the price of a commodity changes, the price of the substitute remaining the same, the price ratio changes (given constant money income). The change in the relative price induces substitution of cheaper good for the expensive one. This change is referred to a substitution effect.
If the price of a commodity decreases, the consumer’s real income increases. The change in the consumption basket due to change in the real income in called income effect
100

22. There are two methods followed for splitting the total price effect into income effect and substitution effect.
Hicksian approach
Slutsky approach
Hicks assumes constancy of real purchasing power of the consumer by keeping the consumer on the same satisfaction level.
Slutsky keeps real purchasing power constant in the sense that the consumer could purchase the original combination of commodities.
101

23. HICKSIAN APPROACH – Normal Commodity (Price Fall)
102

24. HICKSIAN APPROACH – Normal Commodity (Price Rise)
103

25. Slutsky Approach – Income & Substitution Effect (Price Fall)
104

28. STATISTICAL METHOD ECONOMETRIC BAROMETRIC METHOD TREND PROJECTION
METHODS
TREND PROJECTION
LEAD
INDICATORS
GRAPHICAL
METHOD
REGRESSION
METHODS
COINCIDENTAL
INDICATORS
TREND FITTING /
LEAST SQUARE METHODS
SIMULTANEOUS
EQUATIONS
LAG
INDICATORS
BOX-JENKINS METHOD

29. FITTING TREND EQUATION
1. Linear Trend
S=a+bT
2. Exponential Trend
Y = a ebT
Log Y = Log a + bT

30. TABLE 1
YEAR
SALES T T2 ST
1992 10 1
1993 12 2 4 24
1994 11 3 9 33
1995 15 16 60
1996 18 5 25 90
1997 14 6 36 84
1998 20 7 49
140
1999 8 64
144
2000 21 81
189
2001
100
250
n=10
∑=164
∑T=55
∑T2=385
∑ST=1024

31. S=a+bT
∑S=na +b∑T
∑ST=a∑T + b∑T2
See table 1,
164=10a+55b
1024=55a+385b , by solving these two equations we get the trend equation as
S= T
For 11th year
S = (11) = 24,540 tonnes

32. BOX JENKINS METHOD Used for short term projection
Uses stationary time series data
Steps in Box Jenkins Method
1.Eliminate trend from time series data
2.Make sure there is seasonality in stationary time series data (if value of one or more coefficients are different from zero, it reveals seasonality in time series data)
3. Apply models to it.

33. (1)Auto-regressive model
Yt = a1Yt-1 + a2Yt-2 +…..+anYt-n + et
et is random portion of Y which is not explained by the model
(2) Moving Average model
Yt = m + b1et-1 + b2et-2 +….+bpet-p + et
(3) Auto regressive moving average model
Yt = a1Yt-1 + a2Yt-2+..+anYt-n+b1et-1+b2et-2+…+ bpet-p + et

34. YEAR
Population
(X)
Sugar
Consumed
(Y) X2 XY
1992 10 40
100
400
1993 12 50
144
600
1994 15 60
225
900
1995 20 70
1400
1996 25 80
625
2000
1997 30 90
2700
1998
1600
4000
∑n=7
∑X=152
∑Y=490
∑X2=3994
∑XY=12000

35. Simple Regression Method
Y = a + bX
∑Y = na + b∑X
∑XY = ∑Xa + b∑X2
See table
490 = 7a +152 b
12,000= 152a b
By solving these equation we get
Y = X

36. Multi- variate method
QX = a - bPx +cY +dPy+jA
Simultaneous Equation Model
Yt = Ct + It +Gt + Xt
Ct = a + bYt