Consumer Behavior

Consumer Behaviour
• Introduction
• Utility
• Marginal Utility
• Total Utility
• Diminishing Marginal Utility
• Consumer’s Equilibrium for one commodity
• Consumer’s Equilibrium for two commodity
Cardinal Utility Theory
• Utility: the total satisfaction received from consuming a good or
service
• Satisfaction is the act of fulfilling a need, desire, or appetite, or the
feeling gained from such fulfilment
• Cardinal Utility Theory: The Cardinal Utility approach is propounded
by neo-classical economists, who believe that utility is measurable,
and the customer can express his satisfaction in cardinal or
quantitative numbers, such as 1,2,3, and so on.
For example, according to the cardinal utility concept, an individual
gains 20 utils from a pizza and 10 utils from coffee. In the
measurement of utility, neo-classicists assumed that one util equals one
unit of money and the utility of money remains constant.
Cardinal utility theory : Assumptions
• Rationality
• Limited Resource
• There is a continuous consumption of a commodity
• Every unit of the commodity being used is of same size and quality
• there is no change in the income of the consumer, price and
substitues
• Maximise Satisfaction
• Utility cardinally measurable
• Diminishing Marginal Utility
• Marginal Utility of Money is constant
• Utility is additive
Diminishing Marginal Utility

with the increased consumption of a good, the utility derived from

each successive unit goes on diminishing.

This law holds true for the theory of consumer behavior.

Diminishing Marginal Utility : Example
No. of Chocolates Utility
1 50
2 40
3 30
4 20
5 10
6 5
7 0
8 -5
9 -10
Diminishing Marginal Utility : Example
No. of Marginal
Chocolates Utility Total Utility
1 50 50
2 40 90
3 30 120
4 20 140
5 10 150
6 5 155
7 0 155
8 -5 150
9 -10 140
Consumer’s Equilibrium

No. of Price of
Chocolates Utility Chocolate Total Utility
1 50 20 50
2 40 20 90
3 30 20 120
4 20 20 140
5 10 20 150
6 5 20 155
7 0 20 155
8 -5 20 150
9 -10 20 140
Quantity Marginal Utility Marginal Utility
in Units Strawberries Oranges
1 120 120
2 96 110
3 84 100
4 72 90
5 60 80
6 48 70
7 36 40
8 15 20
9 2 4
10 0 0
11 -10 -15

Price of Strawberry = Rs.3, Price of Orange = Rs.5,

How many of units of each good you will buy?

Quantity Marginal Utility MUs/Price Marginal Utility MUo / Price
in Units Strawberries Oranges
1 120 40 120 24
2 96 32 110 22
3 84 28 100 20
4 72 24 90 18
5 60 20 80 16
6 48 16 70 14
7 36 12 40 8
Consumer Surplus
Consumer surplus, also known as
buyer’s surplus, is the economic
measure of a customer’s excess
benefit.
It is calculated by analyzing the
difference between the consumer’s
willingness to pay for a product and
the actual price they pay, also known
as the equilibrium price.
A surplus occurs when the
consumer’s willingness to pay for a
product is greater than its market
price.
Cardinal utility theory : criticisms
• Consumer is not rational
• Carnal utility measurement is not possible
• Marginal Utility cannot be estimated in all conditions
• Marginal Utility of Money does not constant
• Money is not satisfactory measure of utility
• Every commodity is not an independent commodity, ignores cross
effect
• No distinction between income effect and substitution effect
• It does not explain the Giffen paradox
• Too many assumptions