CONSUMER’S BEHAVIOUR ANALYSIS

Marginal Utility Analysis

4.1 Consumer’s Bahaviour Analysis: It tells us how a consumer behaves with his level of consumption.
Consumer’s Behaviour Analysis (Diagramme)

Classical Approach Modern Approach

(Marginal Utility Analysis) (Indifference Curve Technique)

Developer: Marshall Developer: Edgwarth, Pareto, Hicks

Law of Diminishing Marginal Utility
Law of Equimarginal Utility
 Assumptions of Marginal Utility Analysis

• 1. Cardinal measurement of utility: Utilities can be measured in

number like 1, 2, 3 etc.
• 2. Utilities are independent and additive. Utility derived from Mango
is not affected by Apple.
• 3. Constancy of marginal utility of money: Utility of money does not
change, because money is considered as the measuring rod of utility.
• 4. Introspection: To assume that one’s philosophy regarding
consumer’s utility is applicable for everybody.
 Total Utility and Marginal Utility

• Total Utility: Sum of utilities derived from all the units of a commodity
per unit of time. For example Total utility of 5 unit of sweetmeats is
expressed as TU5= U1+U2+U3+U4+U5
• Or, TU5= ∑Ui (i= 1-5)
• n
• For n unit of goods TUn = ∑ Ui
• (i= 1)
• Marginal Utility: Change in total utility resulting from one unit change in
the consumption of a commodity per unit of time. MU6th = TU6 – TU5
• For n unit of goods MUnth = TUn-TUn-1
 Relationship between TU and MU

• 1. As the consumption increases TU increases up to

certain limit.
• 2. As TU increases MU decreases.
• 3. When TU is the maximum, then MU is zero.
• 4. Before MU zero, TU is increasing.
• 5. After MU zero, TU is decreasing and MU is
negative.
 Law of diminishing marginal utility
• Statement of the law:
If a consumption of a commodity is increased successively, the
total utility will increase up to a certain limit and the marginal
utility will decrease. When marginal utility is zero, his total
utility is the maximum. If the consumer is forced to take more,
the marginal utility will become negative and total utility will
also decline. So, as the consumption increases marginal utility
falls. This diminishing nature of marginal utility is called the
law of diminishing marginal utility.
 Tabular Explanation

Level of Total Utility (Tk.) Marginal Utility

consumption (Tk.)
1 25 25
2 45 20
3 60 15
4 70 10
5 75 5
6 75 0
7 70 -5
• Suppose the consumer gets utility of 25 Tk. From the first unit of the
sweetmeat from the shop named “Farazi Sweets”. If he get the second unit
he is willing to less i.e., 20 Tk. because his edge of appetite is already
blunted by the first unit. Now his total utility is Tk. 45. In this way he is
willing to pay Tk.15 and 10 for the third and fourth unit and his total utility
will be Tk. 60 and 70. When he takes the 5th unit of the same commodity he
gets the utility of Tk. 5. Here his marginal utility becomes 75. If he gets the
6th unit of the same commodity, it will not add any additional utility to the
consumer i.e., its marginal utility is zero. His total utility will remain 70. It
is seen that when the marginal utility is zero, total utility is maximum.
• The consumer will not take any more of the same commodity
spontaneously. But if he is forced take more that will rather provide him
disutility. Hence, his marginal utility becomes negative (-5) and
consequently, total utility starts declining. This nature of diminishing
marginal utility is called the law of diminishing marginal utility (LDMU).
X axis and MU is shown
along Y axis. When the
consumer takes the first unit,
he gets utility of 25 Tk. It is
denoted by point A. When
he takes the second unit of
the same commodity, he gets
less utility i.e., Tk. 20,
because his edge of appetite
is already blunted by the first
unit. This is indicated by
point B
 LDMU
• In this way, when he takes the 3rd, 4th and 5th unit he gets MU of Tk. 15,
10 and 5 which are shown as point C, D and E. If he gets the 6th unit of
the same commodity, it will not add any additional utility to the
consumer i.e., its marginal utility is zero. This is shown by point F.
• The consumer will not take the 7th unit of the same commodity willingly.
But if he is forced take the 7th unit that will rather provide him disutility.
Hence, his marginal utility becomes negative (-5) which is expressed by
point G.
• Now, if we add the points A,B,C,D,E,F and G, we will have a downward
slopping line which indicates the inverse relationship between MU and
price (Figure 1). It can also be said that as the consumption increases
marginal utility will diminish. This nature of diminishing marginal utility
is called the law of diminishing marginal utility (LDMU).
 Exceptions/ limitations of the law
• 1. Suitable unit:
• 2. Suitable time
• 3. No change in consumer’s taste and preference
• 4. Normal person
• 5. Income constant
• 6. Changes in other peoples stock
• 7. Rare collection
• 8. Fashion
• 9. Changes in other possessions
• 10. Not applicable for money.
 Consumer’s equilibrium with single commodity
• E is the equilibrium point, where
MU=Price. Any level of consumption
before OM, MU> price. So the
consumer will not stop buying here.
But, any level of consumption after
OM, Price >MU. The consumer will
never buy here. So, OM is the
equilibrium quantity of consumption or
purchase at OP price where the
consumer will get maximum
satisfaction.
• Thus the Condition of consumer’s
equilibrium with single commodity is
MU= Price.
Law of equimarginal utility/Consumer’s equilibrium with
double commodity
• The law of equimarginal utility (LEMU) tells us how a consumer can
have maximum total utility by purchasing or consuming two or more
commodities.

Consumption Consumption O M N
Figure 3: Law of equimarginal utility Consumption
 Algebraic expression

• According to the law of equimarginal utility total utility

will be maximized at that level of consumption where
marginal utilities of both the commodities are equal.
• i.e., Max TU MUf=MUv. If the consumer purchases
26 commodities at a time, his total utility will be
maximized at that level of consumption where, marginal
utilities of 26 commodities are equal.
• i.e., Max TU MUa=MUb=MUc = … = MUz.