Department of Business Economics

BEC 1370 Microeconomics

Year I - Semester II (2022)
Session 02
THEORY OF CONSUMER BEHAVIOUR
Introduction
Cardinal Utility Approach (Part I)

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Lecture Outline
 Introduction

 Approaches of Theory of Consumer Behaviour

 Cardinal Utility Approach
 Utility, Total Utility and Marginal Utility
 Law of Diminishing Marginal Utility
 Consumer Equilibrium for One Commodity

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Introduction to the Theory of Consumer Behaviour
The theory of consumer behavior examines consumer
preferences and what influences their economic behavior.

Assumptions of the Theory of Consumer Behaviour

Individual
preferences determine the amount of pleasure
people derive from the goods and services they consume.
Consumers face constraints or limitations on their choices.
Consumers maximize their pleasure from consumption,
subject to the constrains they face.

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Utility
Goods are desired because of their ability to satisfy human
wants. The property of a good that enables it to satisfy
human wants is called utility.
In other words, utility refers to the satisfaction or happiness
or level of comfort we enjoy from the goods and services we
consume.
USEFULNESS

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Approaches for Theory of Consumer Behaviour

Cardinal Utility
Approach
Theory of
Consumer
Behavior
Ordinal Utility
Approach

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Cardinal Utility Approach
Cardinal Utility Theory assumes that personal utility can
be measured in exact units of measurement, called
‘utils’.

Total Utility is the total amount of satisfaction that

the consumer obtains from the consumption of a
commodity per time period.

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Cardinal Utility Approach cont.

 Marginal Utility (MU) measures the additional satisfaction

derived from an additional unit of a commodity (When the
levels of consumption of all other commodities held
constant).
 MU of good X is given by,

Marginal Utility of X = Change in Total Utility of X

Change in X

MUx = ∆TUx
∆X

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 No. of Burgers per Time
Total and Marginal Utility Schedules Total Utility Marginal Utility
Period
0 0
  20
1 20
  10
2 30
 
7
3 37
 
4 40 3
 
5 42 2
 
6 42 0

7 39
-3
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Total Utility Curve
45
40
35
TU
30
Total Utility

25
20
15
10
5
0
0 1 2 3 4 5 6 7 8

No. of Burgers per Time Period

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Marginal Utility Curve
25

20
Marginal Utility

15

10

0
0 1 2 3 4 5 6 7
-5
MU
No. of Burgers per Time Period

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 Maximum Total Utility
TU

Consumer has
derived the TU
maximum TU
when MU is zero.

No. of Burgers per Time Period

MU

MU No. of Burgers per Time Period

The Law of Diminishing Marginal Utility
This law states that, as a person consumes more and more of a
given commodity per time period (when the consumption of other
commodities being held constant), MU will eventually tend to decline.

The negatively sloped portion of the MU curve reflects the law of

diminishing marginal utility.
MU

0 MU No. of Burgers per Time Period

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The Law of Diminishing Marginal Utility cont.
Assumptions
1. Unit of the consumer good must be standard.
(E.g.: Chicken Pizza or Vegetable Pizza)
2. Consumer’s taste and preferences remained unchanged
during the period of consumption.
3. Continuity in the consumption and where break in
continuity is necessary, it must be appropriately short.
4. Mental condition of the consumer remains normal during
the period of consumption.

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Eat as
much as
you
can....
Mathematical Approach
Total Utility is a function of the quantity of commodities consumed.
If only one good is consumed,
U = f (Q)
Marginal Utility is the SLOPE or first derivative of the total utility
function.
U’(Q) > 0 : MU is Positive
U’(Q) < 0 : MU is Negative
Second derivative of the total utility function shows the slope of MU
curve.
The law of diminishing marginal utility occurs when,
U"(Q) < 0
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Consumer Equilibrium/Consumer Optimum/
Optimum Consumption Level for One Commodity

The consumer will maximize his/her total satisfaction

derived from the consumption of a particular commodity
when MU equals to the price of the commodity.
MU = P
We can re-write this as:
MU = 1
P
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Consumer Equilibrium for One Product cont.
MU/P Only when MU = P,
consumer reaches the
Equilibrium Condition equilibrium
MU = P

P
} When MU > P, consumer tends
to increase consumption.

MU
} When MU < P, consumer tends
to reduce consumption

0
QE No. of Burgers per Time Period

Equilibrium Quantity
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Consumer Optimum for One Product cont.

Therefore, in general, form conditions for consumer’s

equilibrium or optimum purchasing rules can be shown as:
MU = P Equilibrium condition 1
M = P.Q Equilibrium condition 2
Where M refers to the amount of money he/she has.
(A person consumes as long as MU ≥ P if he/she does not
have enough money to satisfy equilibrium condition 2.)

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Thank You