CONSUMER’S

BEHAVIOR
ANALYSIS
Unit 4
Slide 1
CONCEPT OF UTILITY
 It is a measure of satisfaction an individual
gets from the consumption of the
commodities.
 In other words, it is a measurement of
usefulness that a consumer obtains from
any good.
 A utility is a measure of how much one
enjoys a movie, favorite food, or other
goods.
 It varies with the amount of desire.
 The need satisfying capacity of goods and
services is called utility
 According to Walras the unit of utility is
utils
CARDINAL & ORDINAL
UTILITY
CARDINAL UTILITY
ANALYSIS
 This approach was developed by H.H
Gossen and popularized by Alfred
Marshall. Other believers of this approach
are A.C. Pigou and Robertson.
 In this approach, one believes that utility
is measurable.
 One can express his or her satisfaction in
cardinal numbers i.e., the quantitative
numbers such as 1, 2, 3, and so on.
 It tells the preference of a customer in
cardinal measurement.
 It is measured in utils.
CARDINAL UTILITY
ANALYSIS
 Assumptions:
 1. Rationality: A rational consumer is that who
tries to maximize his satisfaction with his
limited income. And this approach is based on
assumption of rational consumer.
 2. Utility is Measurable: Assumes that utility
is cardinally measureable. That means utility
can be measured in cardinal numbers like
1,2,3,4…. For example a person can say that he
derives utility equal to 10 units from good A or
20 units from good B.
 Some economist believe that utility of one unit
of good equals to the units of money that a
consumer is willing to pay, which means that 1
util = 1 unit of money.
CARDINAL UTILITY
ANALYSIS
 3. Constant marginal utility of money: This
approach assumes that whatever the level of income,
the MU of money remains the same. According to this
assumption, money is used as a measure of utility.
 4. Diminishing Marginal Utility: It constitutes the
basis for consumer behavior analysis. The utility
gained falls as more and more units of a good are
consumed.
 5.Utility is Additive: Implies that utility is not only
cardinally measurable, but can be added together to
obtain the total utility. For instance, a consumer
consumes X1, X2, and X3 units of good X and derives
U1, U2 and U3 utils, respectively. In such a case, the
total utility derived by a consumer from n units
of good X is expressed as:
 Un = U1 (X1) + U2 (X2) + U3 (X3) +…………+ Un (Xn)
CARDINAL UTILITY
ANALYSIS
 6. Independent utilities: This approach
assumes that the utility derived from
the consumption of X commodity is
independent from the utility derived
from the consumption of Y commodity.
CONCEPT OF TU AND MU
 Total utility :
 "Total utility is the total satisfaction obtained from
all units of a particular commodity consumed over a
period of time“.
 For example, a person consumes 3 eggs and gains
50 utils of total utility. This total utility is the sum of
utilities from the successive units (30 utils from the
first egg, 15 utils from the second and 5 utils from the
third egg).
 Summing up total utility is the amount of satisfaction
(utility) obtained from consuming a particular quantity
of a good or service within a given time period.
 It is the sum of marginal utilities of each successive
unit of consumption.
 Formula:TU = MU1+MU2+……+Mun = ∑ MUx
CONCEPT OF TU AND MU
 Marginal utility :
 "Marginal utility means an additional or incremental
utility derived from the consumption of additional unit of
the commodity.
 Marginal utility is the change in the total utility that results
from unit one unit change in consumption of the
commodity within a given period of time".
 For example, when a person increases the consumption
of eggs from one egg to two eggs, the total utility
increases from 30 utils to 45 utils. The marginal utility here
would be the15 utils of the 2nd egg consumed.
 Marginal utility, thus, can also be described as difference
between total utility derived from one level of
consumption and total utility derived from another level of
consumption.
 Formula: MU = ∆TU

∆Q
Or MU=TU2-TU1
 CONCEPT OF TU AND MU
Units of Apples Total Utility in Marginal Utility in
Consumed Daily Utils Per Day Utils Per Day
1 7 7
2 11 4 (11-7)
3 13 2 (13-11)
4 14 1 (14-13)
5 14 0 (14-14)
6 13 -1 (13-14)
Describe the schedule.
CONCEPT OF TU AND MU
LAW OF DIMINISHING MU
EQUILIBRIUM OF THE
CONSUMER
 The term ‘equilibrium’ is frequently used
in economic analysis.
 Equilibrium means a state of rest or a
position of no change.
 It refers to a position of rest, which
provides the maximum benefit or gain
under a given situation.
 A consumer is said to be in equilibrium,
when he does not intend to change his
level of consumption, i.e., when he
derives maximum satisfaction
EQUILIBRIUM OF THE
CONSUMER
 Consumer’s Equilibrium refers to the
situation when a consumer is having
maximum satisfaction with limited income
and has no tendency to change his way of
existing expenditure.
 A rational consumer aims to balance his
expenditure in such a manner, so that he
gets maximum satisfaction with minimum
expenditure. When he does so, he is said to
be in equilibrium. After reaching the point of
equilibrium, there is no further incentive to
make any change in the quantity of the
commodity purchased.
EQUILIBRIUM OF THE
CONSUMER
 The Law of DMU is used to explain consumer’s
equilibrium in case of a single commodity.
Therefore, all the assumptions of Law of DMU
are taken as assumptions of consumer’s
equilibrium in case of single commodity.
 A consumer purchasing a single commodity will be
at equilibrium, when he is buying such a quantity of
that commodity, which gives him maximum
satisfaction.
 The number of units to be consumed of the given
commodity by a consumer depends on 2 factors:
 1. Price of the given commodity;
 2. Expected utility (Marginal utility) from each
successive unit.
EQUILIBRIUM OF THE
CONSUMER
 In other words a consumer is in
equilibrium when the MU of a good is
equal to the market price of the good.
For example, the consumer is
consuming X good . In this case the
consumer is in equilibrium when MUx is
equal to Px. This can be expressed as:
MUX/Px = MUm
 As the MUm (Marginal Utility of money)
is constant , lets suppose 1
 MUx=Px
EQUILIBRIUM OF THE
CONSUMER
Price of commodity and income of consumer is given.
This model can further be explained with the given table
and figure.
Unit of X MU (Rs) Px(Rs)

1 30 15

2 25 15

3 20 15

4 15 15

5 10 15

6 5 15
EQUILIBRIUM OF THE
CONSUMER
EQUILIBRIUM OF THE
CONSUMER
 In the figure PX is Price and Mux is
marginal utility curve respectively. The
Px and Mux are intersected at point E
where Px = Mux ,there fore E is the
consumers equilibrium point. When
Px>Mux the consumer can increase his
satisfaction by reducing the
consumption or purchase of X
commodity and when Px<Mux the
consumer can increase his satisfaction
by increasing the purchase of x
commodity. So the rational consumer is
at equilibrium at point E where Px=MUx
 Units MUx MUy
1 12 10
2 10 8
3 8 6
4 6 4
5 4 2
Total 40 30

Suppose Px=1 and Py=1

Amount of money the consumer have = Rs 5
Equilibrium of consumer is at that units of goods where =

= = MUm
LIMITATIONS/EXCEPTIONS
OF LAW OF SUBSTITUTION
 Utility can’t be measured in numbers:
Utility can’t be measured in terms of numbers. It
can only be expressed in terms of range i.e. high or
low.
 Ignorance of consumers:
If the consumer is ignorant about the availability of
substitute goods in market then he can’t substitute
the commodity having high M.U instead of low.
 Frequent change in price:
This law assumes that price of commodity remains
constant. Generally utility is judged on the price. If
the price changes then there is not application on
the law of diminishing M.U. At that time we can’t
measure M.U of different commodity properly.
LIMITATIONS/EXCEPTIONS
OF LAW OF SUBSTITUTION
 Influence of custom and fashion:
In the case of commodity related to custom and
fashion this law is not applicable because while
purchasing such commodity they don’t care about
equalizing M.U from different commodity.
 M.U of money doesn’t remain constant:
This law assumes that M.U of money is constant
but in reality M.U of money is changeable on the
basis of amount of money with people.
 Individual goods:
In the case of individual this law is not applicable
because such goods like T.V, motorcycle, fridge, etc
are purchased once at a time. As a result there is
not the possibility of comparison of M.U of such
goods among each other.
LIMITATIONS/EXCEPTIONS
OF LAW OF SUBSTITUTION
 Shortage of goods:
If there is shortage of goods in market
there is no any question to equalize the
M.U from several commodities.
 Addiction:
This law is not applicable for addict
because druggist, drunkard, etc are not
ready to sacrifice any single drop of
drug or alcohol for other commodity.
IMPORTANCE OF LAW OF
SUBSTITUTION
 Consumption
 Production
 Exchange
 Distribution
 Public finance
EQUILIBRIUM OF CONSUMER:
TWO COMMODITY MODEL
 In two commodity model a consumer is in
equilibrium when the ratio of marginal
utility and price of each commodity is
equivalent to marginal utility of money.
 “ If a person has a commodity which has
several uses (money), he distributes it in
such a way that it has equal marginal utility
in all.”- Marshall
 This theory generalizes that the consumer
is in equilibrium or gets maximum
satisfaction only when he equal marginal
utilities from the consumption of
differentcommodities.
EQUILIBRIUM OF CONSUMER:
TWO COMMODITY MODEL
 So consumer should allocate his
money / income on goods in such a way
that the value of last unit of money
spent on these goods is equal to the
ratio between marginal utilities and
price of respective goods.
 Therefore ,
 Equilibrium:MUx/Px=MUy/Py=MUm
 If MUx/Px>MUy/Py , the consumer
increases the consumption of x good
and reduces the consumption of y good
and comes to the oncition of
EQUILIBRIUM OF CONSUMER:
TWO COMMODITY MODEL
 If MUx/Px< MUy/Py, the consumer
increases the consumption of y good
and reduces the consumption of x good
and comes to the oncition of
MUx/Px=MUy/Py .
 For example a consumer has 24 Rs to
spend on x and y commodity and price
of x and y goods
units 1 2 3
respectively
4 5
are
6
Rs 2
and Rs 3
MUx 40 36 32 28 24 20
MUy 48 42 36 30 24 18
EQUILIBRIUM OF CONSUMER:
TWO COMMODITY MODEL
units MUx MUy MUX/Px MUy/Py
1 40 48 20 16
2 36 42 18 14
3 32 36 16 12
4 28 30 14 10
5 24 24 12 8
6 20 18 10 6

The equilibrium combination is

6x+4y
Describe the above table.
 Draw the figure according to above
table and explain consumer’s
equilibrium.
QUESTIONS
1. Given: Px=5 , Py=6 and Money
Qty.income=45
1 2 3 4 5 6
MUx 35 32 25 17 8 1
MUy 60 55 48 40 30 15

Find out equilibrium consumption of X

and Y .