Utility Analyses
The
theory of demand seems to establish relationship between quantity demanded of a
commodity and its price. Why does a consumer demand a particular good? There
are three approaches in the theory of demand to give an answer for this
question. These are; (i) The cardinal utility approach; (ii) Indifference curve
approach, and (iii) The revealed preference approach.
Utility
It
is defined as the power of a commodity or service to satisfy a human want It is
a subject phenomenon varies from person to person. The utility depends on the
mental made up of the consumer. It does not carry moral or legal significance.
For example liquor is harmful for health yet it has utility for an alcoholic.
Thus utility has no physical existence, the same commodity may have different
degrees of utility for different persons, it cannot be equated with usefulness,
and it carries no moral or legal significance.
Cardinal and Ordinal Utility
According
to the concept of cardinal, utility can be measured and compared in terms of
number of units. According to the concept of ordinal utility the utilities
derived from the consumption of commodities cannot be measured and compared. It
can simply state apple is more preferable to a mango or a mango is less
preferable to a particular person. The theory of consumer's behavior can be
explained without the idea of measurable utility. The units of measurement are
imaginary.
INTRODUCTION
All of us in our daily life, consume
various goods and services within our given income constraint. Whenever we
visit the market to purchase a particular item to match our requirement, we
often get puzzle by the multiplicity of the goods, which are all they near to
our requirement. This is the point where we make choices to obtain the maximum
possible satisfaction by spending the minimum of our income. Though we may
differ in our likes and dislikes, as consumer we are assumed to behave
rationally and consistently. Our likes and dislikes are reflected through our
preferences. We choose an item from our preferences that suits our budget. The
theory of consumer behavior deals with reconciliation of our dreams with the
budgets.
Significance of Demand Analysis
Demand is one of the crucial
requirements for the functioning of any business enterprise, its survival and
growth. Information on the size and type of demand helps the management in
planning its requirements of men, materials, machines and money. For example,
if the demand for a product is subject to temporary business recession, the firm
may plan to pile up the stock of unsold products. If the demand for a product
shows a trend towards a substantial and sustained increase in the long run, the
firm may plan to install additional plant and equipment to meet the demand on a
permanent basis. If the demand for a firm’s product is falling, while its rival
sale is increasing, the firm needs to plan undertake some sales promotion
activity like advertisement. If the firm’s supply of the products is unable to
meet the existing demand, the firm may be required to revise the production
plan and schedule; or the firm may have to review its purchase plan for inputs
and the suppliers’ response to input requirement by the firm. In the same way,
larger the demand for the firm’s product, the higher is the price the firm can
charge. The common theme underlying these examples is that the whole range of
planning cost budgeting, purchase plan, market research, pricing decision,
advertisement budget and profit planning etc. call for an analysis of demand.
In fact, demand analysis is one area of economics that has been used most
extensively by business. The decision which management makes with respect to
any functional area, always hangs on an analysis of demand.
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