Consumer’s Behaviour

Individual tries to satisfy his wants

Human wants are unlimited

Utility analysis – want satisfying efforts

Economics “utility means want satisfying power of a commodity”

“utility is the capacity of a commodity to satisfy human

want”. ……….. Prof. Stanley Jevons

Introduction

Relative concept

Subjective concept

Ethically neutral

Utility and usefulness are not same

Not same as pleasure

Utility differs from satisfaction

Not easily measurable

Depends upon intensity of want

It is the basis of demand

Features of Utility

Types of Utility

Form utility

Place utility

Time utility

Ownership utility

Service utility

Knowledge utility

Nature utility

Kashmir

Kokan

Concepts of Utility Concepts of Utility

Total Utility Marginal Utility

“Total Utility refers to the sum of utilities derived form the consumer from all units of commodity consumed”.Aggregate of utilities All successive units of commodity TU = ∑ MU / TUn = MU1 + MU2 + MU3

TU = Total Utility, MU = Marginal Utility

Total Utility

Total Utility ScheduleUnits of

CommodityTU Units

1 82 143 184 205 206 18 o X

Y

1 2 3 4 5 6

48

121620

units of commodity

Tota

l Util

ityDiagram

TU curve

“it refers to the additional utility derived by a consumer from additional unit of a commodity consumed. It is the utility from the last unit of a commodity”.MU is the addition made by last unit to TU. MUn = TUn-TU(n-1)

Total Utility

Total Utility ScheduleUnits of

CommodityMU Units

1 82 63 44 25 06 -2

o X

Y

1 2 3 4 5 6

2468

units of commodity

Mar

gina

l U

tility

Diagram

MU curve-2

Relationship Between TU & MU

Units of Commodity

TU Units

MU Units

1 8 82 14 63 18 44 20 25 20 06 18 -2

TU and MU Schedule

o X

Y

units of commodity

1 2 3 4 5 6

4

8

12

16

20

Mar

gina

l U

tility

Diagram

-2MU curve

TU curve

Point of Satiety

Disutility

Introduction

Behavior of the consumer

Relation to consumption

First Proposed : Mr. Gossen – Gossen’s first Law

Further explained : Prof. Alfred Marshall

Name of book : Principles of Economics – 1890

Basis of Law : satiability characteristics of human

wants

The law of Diminishing Marginal Utility

Dr. Alfred Marshall

Statement of Law : Other things being equal “The

additional benefit which a person derives from a given increase in

the stock of a thing diminishes with every increase in the stock that

he already has” ………Dr. Alfred Marshall

The law of Diminishing Marginal Utility

Units of Commodity

MU Units

1 82 63 44 25 06 -2

MU Schedule

o X

Y

1 2 3 4 5 6

2468

units of commodity

Mar

gina

l U

tility

Diagram

MU curve-2

Disutility

Assumptions

Homogeneity

Single use

Cardinal measurement

Rationality

Continuity

Reasonability

Constance

Divisibility

The law of Diminishing Marginal Utility

The law of Diminishing Marginal Utility

Exceptions

Hobbies

Misers

Drunkard

Music

Reading

Money

Limitations / Criticism

Unrealistic assumptions

Cardinal measurement

Indivisible goods

Constant marginal utility of money

A single want

The law of Diminishing Marginal Utility

AssumptionsHomogeneity

Single useCardinal measurement

Rationality Continuity

ReasonabilityConstance Divisibility

Very Testy

The law of Diminishing Marginal Utility

Theoretical importance Practical importance

Paradox of value

Universal Truth

Basis of law of demand

To Consumer

To the Government

To Producer

To Monopolist

For welfare Measure

Importance / Significance of the Law

Introduction :

Developed by : Alfred Marshall

Basis of Law : Three characteristics of wants –

comparable, substitutable & complementary

Statement of Law : other things being equal “A consumer gets maximum total utility from spending his income,

when the marginal utility derived from the last unit of money, spend

on each commodity tend to be equal”……….Alfred Marshall

law of Equi-Marginal Utility

law of Equi-Marginal Utility

Equi-Marginal Utility Schedule

Units of Com -modity

MU ‘A’

Ratio = MU ‘B’

Ratio = MU ‘C’

Ratio =

1 24 30 32

2 20 24 24

3 16 18 16

4 12 12 08

5 8 6 00

= = = MUm

law of Equi-Marginal UtilityConsumer expenditure

Commodity Units Price Amount Spent (Units X Price)

A 4 2 8B 3 3 9C 2 4 8

Total 25

= = = MUm

= = = MUm

6 = 6 = 6

TU derived = TUA → 24+20+16+12=72

TUB → 30+24+18+12 units

TUC → 32+24 = 56 units

Total utility 200 units

Assumptions

Measured cardinally

Rationality

No change in income

Homogeneity

Constancy of money

Knows MU schedule &

price

Exceptions

Unrealistic assumption

Change in income

Other exceptions

law of Equi-Marginal Utility

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