Consumer Behavior and Demand
Analysis
Unit-2
7/11/2017 BBA 107
Consumer Behavior and Demand
Analysis
Utility and Cardinal Utility analysis
7/11/2017 BBA 107
I. Introduction to Utility Analysis
a) Meaning of Utility
b) Cardinal Utility analysis and Ordinal Utility
Analysis
c) Total Utility and Marginal Utility
II. Cardinal Utility
a) Assumptions of Cardinal Utility analysis
b) Law of Diminishing Marginal Utility
c) Law of Equal-Marginal Utility
III. Critical evaluation of Cardinal Utility analysis
IV. Conclusion
7/11/2017 BBA 107
1. Introduction to Utility Analysis
a) Meaning of Utility
b) Cardinal Utility analysis and Ordinal Utility Analysis
c) Total Utility and Marginal Utility
7/11/2017 BBA 107
Meaning of Utility
7/11/2017 BBA 107
I. Introduction to Utility Analysis
Meaning of Utility
Utility means - The power of a commodity that satisfy the wants of
consumer - want satisfying power
Introduced by Jermy Bentham
Measurement ‘Utils’
Subjective entity
7/11/2017 BBA 107
Cardinal Utility analysis and Ordinal Utility
Analysis
7/11/2017 BBA 107
Cardinal Utility analysis and Ordinal Utility Analysis
Utility Analysis
Cardinal Utility analysis Ordinal Utility Analysis
• Alfred Marshal • J. R. Hicks & R.G.D. Allen
• can be measured •Cannot be measured but compared
• ‘Utils’ as rank
• Law of Diminishing Marginal • Indifference Curve analysis
Utility
• Quantitative
. Subjective entity or Personal
•Law of Equi-marginal Utility
•Mashellian Analysis
7/11/2017 BBA 107
Total Utility(TU) and Marginal
Utility(MU)
7/11/2017 BBA 107
Total Utility(TU) and Marginal Utility(MU)
Unit of Total Marginal
•Total Utility is the sum utility derived from Mango Utility Utility
the consumption of bundle of commodity 1 10
2 20
3 29
•Marginal Utility is the rate of change of TU 4 37
from one more unit of extra consumption 5 43
6 48
7 51
8 52
MUn = TUn – TUn-1 9 52
10 50
MU =∆TU/∆Q
7/11/2017 BBA 107
Total Utility(TU) and Marginal Utility(MU)
Unit of Total Marginal
•Total Utility is the sum utility derived Mango Utility Utility
from the consumption of bundle of 1 10 10
commodity 2 20 10
3 29 9
4 37 8
•Marginal Utility is the rate of change 5 43 6
6 48 5
of TU from one more unit of extra
7 51 3
consumption
8 52 1
9 52 0
MUn = TUn – TUn-1
10 50 -2
MU =∆TU/∆Q
7/11/2017 BBA 107
I. Introduction to Utility Analysis
a) Meaning of Utility
b) Cardinal Utility analysis and Ordinal Utility Analysis
c) Total Utility and Marginal Utility
II. Cardinal Utility
a) Assumptions of Cardinal Utility analysis
b) Law of Diminishing Marginal Utility
c) Law of Equal-Marginal Utility
III. Critical evaluation of Cardinal Utility analysis
IV. Conclusion
7/11/2017 BBA 107
2. Cardinal Utility Analysis
a) Assumptions of Cardinal Utility analysis
b) Law of Diminishing Marginal Utility
c) Law of Equal-Marginal Utility
7/11/2017 BBA 107
Assumptions of Cardinal Utility analysis
7/11/2017 BBA 107
Assumptions of Cardinal Utility analysis
1. Rationality of consumer
2. Cardinal measurability of utility
3. Marginal Utility of Money is constant
4. Diminishing Marginal Utility
5. Utility is Additive – TU= Ux+ Uy+ Uz+…….+ Un
6. The hypothesis of Independent Utility
7. Introspective method
7/11/2017 BBA 107
Law of Diminishing Marginal Utility
Gossen First law
7/11/2017 BBA 107
Law of Diminishing Marginal Utility
• Gossen first law
•According to Alfred Marshall ‘the additional utility which a person derive
from the consumption a commodity diminishes, that is Total Utility increase
at an diminishing rate ‘
7/11/2017 BBA 107
Law of Diminishing Marginal Utility
‘the additional utility which a person derive from the consumption a commodity
diminishes, that is Total Utility increase at an diminishing rate ‘
Unit of Total Marginal
Mango Utility Utility
1 10
2 20
MUn = TUn – TUn-1
3 29
4 37
MU =∆TU/∆Q
5 43
6 48
7 51
8 52
9 52
10 50
7/11/2017 BBA 107
Law of Diminishing Marginal Utility
‘the additional utility which a person derive from the consumption a
commodity diminishes, that is Total Utility increase at an diminishing rate ‘
Unit of Total Marginal
Mango Utility Utility
1 10 10
2 20 10
3 29 9
4 37 8
5 43 6
6 48 5
7 51 3
8 52 1
9 52 0
10 50 -2
7/11/2017 BBA 107
Law of Diminishing Marginal Utility
‘the additional utility which a person derive from the consumption a
commodity diminishes, that is Total Utility increase at an diminishing rate ‘
Unit of Total Marginal
Mango Utility Utility
TU
1 10 10
TU
2 20 10
3 29 9
4 37 8 No of mango
5 43 6
6 48 5
7 51 3 MU
8 52 1
9 52 0
10 50 -2
No of mango
7/11/2017 BBA 107 MU
Law of Diminishing Marginal Utility
Saturation Point MU =0 or TU is maximum
TU
TU
No of mango
MU
No of mango
MU
7/11/2017 BBA 107
Application of Law of Diminishing Marginal Utility
7/11/2017 BBA 107
Application of Law of Diminishing Marginal Utility
1. Bases of law of demand- why demand curve slops downward
2. Law of equi- marginal utility is derived
3. Consumer surplus derived
4. Progressive Tax can be justified
5. Water-diamond paradox resolve
7/11/2017 BBA 107
Law of Equal-Marginal Utility
Consumer’s Equilibrium under Marshellian analysis
(Goosen’s Second Law)
7/11/2017 BBA 107
Law of Equal-Marginal Utility
Consumer’s Equilibrium under Marshellian analysis
•Gossen Second Law
•Explain how consumer is maximize his satisfaction by allocating his income with
different commodity at various prices.
• Condition for consumer equilibrium two commodity
MUx/ = MUy/ = MU m
Px Py
• Condition for consumer equilibrium more commodity
MUx/ = MUy/ = ……………………. MUn/P n = MU m
Px Py
7/11/2017 BBA 107
Law of Equal-Marginal Utility
Consumer’s Equilibrium under Marshellian analysis
Condition for consumer equilibrium
MUx/ = MUy/ =MUm
Px Py
Apple (A) MUA MU/PA Banana (B) MUB MU/PB
1 60 20 1 60 12
2 48 16 2 55 11
3 42 14 3 50 10 Apple – 5 Rate 15 Rupees
4 36 12 4 45 9 Banana – 3 Rate 15 Rupees
5 30 10 5 40 8
6 24 8 6 35 7
7 18 6 7 20 4
Price of A = 3 Price of B =5
MU of Money = 10
Expenditure = 5x Price of A + 3 X Price B
= 5 x 3 + 3 X 5 = Rs.30
7/11/2017 BBA 107
Law of Equal-Marginal Utility
Consumer’s Equilibrium under Marshellian analysis
•Gossen Second Law
•Explain how consumer is maximize his satisfaction by allocating his income with
different commodity at various prices.
Marginal Utility
MU Apple
MU Banana
9 8 7 6 5 4 3 2 1 1 2 3 4 5 6 7 8 9
Unit of A Unit of B
7/11/2017 BBA 107
Critical evaluation of Cardinal Utility analysis
7/11/2017 BBA 107
Critical evaluation of Cardinal Utility analysis
• Utility is not Cardinally measurable
• Marginal Utility of money is not constant
• Inadequacy of methods of introspection
• Utilities are n interdependence
• Failure to explain Giffen Paradox
• Failure to distinguish income effect and substitution
effect
7/11/2017 BBA 107
