Consumer Behavior

 To use budget in such a way so as to get

maximum satisfaction (utility).
 Utility:
“satisfaction achieved by using a good or service is
called utility”
Or
“The power of a commodity to satisfy human wants
is called utility”
 Marginal Utility
 “Marginal utility is the change in total utility
due to change in consumption units”
MU=∆TU /∆X
Or
 “The utility of the next (extra, last or further)
unit of consumption is called marginal utility“
 Total Utility (TU)

 “The sum of utility derived by all consuming

units is called total utility”
Law of Diminishing Marginal Utility
 “if other factors remain constant then by
consuming more and more units of a
commodity, the utility derived from each
successive unit will be diminished
(decreased)”
 Limitations of the Law
 Addicted consumer has more and more utility
 Human beings are greedier to get additional
money
 No limit to collect more precious and
commodities like diamond
 Marginal utility for rich and poor people are
different
 Measurement of utility
 Cardinal Approach
 Ordinal Approach
 Cardinal Theory (Dr. Marshall)
 “Utility is measurable in terms of specific numbers
called utils”
 Utils:
 An imaginary unit of satisfaction from the consumption
of a good
 Consumer Surplus
 The excess of what a person would have been
prepared to pay for a good (i.e. utility) over
what that person actually pays
 Marginal Consumer Surplus
 The difference b/w what you are willing to mpay
for one more unit of a good and what you are
actually charged
 MCS=MU-P
 graph
 Equilibrium of Consumer
 MU>P
 MU<P
 MU=P
 MUA/PA = MUB/PB = MUC / Pc = ……..
 Law of Equi- Marginal Utility
 A consumer should spend his budget on
different commodities in such a way that
marginal utilities of all consuming goods
should be equal to each other
 MUX = MUY = MUZ = ……….
Money Units MUX MUY

1 24 20

2 20 16

3 16 12

4 12 8

5 8 4
 If budget is given and prices of commodities
are same then
 “A consumer should spend his budget on
different commodities in such a way that the
ratios between marginal utilities of all
consuming commodities and their prices
should be equal to each other”
 If Px=2 and Py =1
Money Units MUX MUY

1 16 20

2 12 16

3 8 12

4 4 8

5 0 4

MUx/Px=MUy/Py
 Limitations of the law
 Utility is quality and so its quantitative
measurement is not possible.
 Personal requirements or needs of fashion
 Ignorance
 Indivisible
Derivation of Demand Curve (under
utility approach)
 An individual’s Demand curve
 PX = MUX
 The market demand curve
 The horizontal sum of all individual’s demand
curves and hence MU curves