Theory Of Consumer Behaviour

The theory of consumer behaviour also called the theory of household behaviour, focuses on how individuals or households allocate their limited income among various commodities to achieve equal satisfaction.   What is utility? Utility is the satisfaction derived from consuming a specific commodity. Thus, when a consumer finds satisfaction in consuming a commodity, it indicates […]

The theory of consumer behaviour also called the theory of household behaviour, focuses on how individuals or households allocate their limited income among various commodities to achieve equal satisfaction.

 

What is utility?

Utility is the satisfaction derived from consuming a specific commodity. Thus, when a consumer finds satisfaction in consuming a commodity, it indicates that the commodity possesses utility.

Utility is relative to the consumer and depends on factors such as time, place, and form. A commodity satisfying one consumer’s want at a particular time and place may not fulfill another’s desire.

Two main schools of thought analyze utility: the Cardinal School of Thought and the Ordinal School of Thought.

 

Cardinal School Of Thought

This approach asserts that utility is measurable. After consuming a certain quantity of a commodity, a consumer can evaluate satisfaction using figures ranging from zero to infinity.

Assumptions Of Cardinal Approach

  1. Utility is measurable.
  2. The consumer is rational.
  3. There is diminishing marginal utility.
  4. Total utility (TU) depends on the quantity consumed.
  5. The consumer’s money income is constant.

 

Concept Of Total, Average, And Marginal Utility

Total Utility: The overall satisfaction a consumer derives from consuming a commodity at a specific point in time. While utility increases with the quantity consumed, it does so at a decreasing rate due to a saturation point.

Average Utility: Derived by dividing total utility by the units of the commodity consumed. It represents satisfaction per unit of the commodity consumed (AU = TU/Q).

Marginal Utility: Additional satisfaction from consuming an extra unit of a commodity. It is the change in total utility resulting from consuming an additional unit (MU = ∆TU/∆Q).

In the context of utility analysis, a utility schedule provides a detailed account of the relationship between the quantity of a consumed good and various utility measures, including Total Utility (TU), Average Utility (AU), and Marginal Utility (MU). Each row in the schedule corresponds to a different quantity of the commodity consumed.

 

Quantity 1:

  1. Total Utility (TU): At a quantity of 1, the total satisfaction derived is 4 units.
  2. Average Utility (AU): Since only one unit is consumed, the average utility is also 4 units.
  3. Marginal Utility (MU): For the first unit consumed, marginal utility is not applicable and is represented as “–” in the schedule.

 

Quantity 2:

  1. Total Utility (TU): The satisfaction increases to 7 units with the consumption of the second unit.
  2. Average Utility (AU): Calculated by dividing the total utility (7) by the quantity consumed (2), resulting in an average utility of 3.5 units.
  3. Marginal Utility (MU): The additional satisfaction from the second unit is 3 units.

 

Quantity 3:

  1. Total Utility (TU): Further consumption brings the total satisfaction to 9 units.
  2. Average Utility (AU): The average utility decreases slightly to 3 units (9/3).
  3. Marginal Utility (MU): The additional satisfaction from the third unit is 2 units.

 

Quantity 4:

  1. Total Utility (TU): With the consumption of the fourth unit, the total satisfaction reaches 10 units.
  2. Average Utility (AU): Calculated as 10/4, resulting in an average utility of 2.5 units.
  3. Marginal Utility (MU): The marginal utility for the fourth unit is 1 unit.

 

Quantity 5:

  1. Total Utility (TU): Despite consuming an additional unit, the total satisfaction remains at 10 units, indicating a saturation point.
  2. Average Utility (AU): Drops to 2 units (10/5).
  3. Marginal Utility (MU): The additional satisfaction from the fifth unit is 0 units, implying no increase in total satisfaction.

 

The utility schedule illustrates the changing dynamics of total, average, and marginal utility as the quantity of the consumed good varies, providing insights into consumer satisfaction patterns and the diminishing marginal utility principle.

RELATIONSHIP BETWEEN TOTAL UTILITY AND MARGINAL UTILITY

The Marginal Utility (MU) starts to decline after consuming the first unit, reaching zero on the x-axis. Total Utility (TU) peaks when MU hits zero, and as MU descends below the x-axis, TU starts to decrease.

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