Principles of Economics BBA
103 N
Consumer Behavior - I
Utility Analysis
• According to Prof. Hibdon, “ Utility is
the ability of a good to satisfy a
want. ”
• According to J.S Nicholson , “ Utility
may be the quality which makes a
thing desirable.”
Forms of Utility
• Natural : Free goods that posses
utility like air, water ,sunshine etc.
• Form : Human efforts which help to
change its shape or form of goods.
• Place : Utility can be raised by
transporting a good from one place
to another .
• Time : A commodity stored and with
passage of time ,its utility increases.
Forms of Utility
• Service Utility : The service of
doctors , teachers ,engineers and
artists are known as service utility as
they possess the capacity to satisfy
human wants .
Features of Utility
• Utility is subjective
• Utility is Relative and Variable
• Utility is not measurable
• Utility and Usefulness
• Utility and Pleasure
• Utility and Morality
• Utility is Abstract
Concept of Utility
• It could be explained on the basis of
the consumption of a commodity as:
Initial Utility- The utility derived from
the consumption of its first unit . It is
always positive.
Marginal Utility- It is the addition
made to total utility by consuming
one more unit of a commodity .
Concept of Utility
• Algebraically , the marginal utility
can be expressed as :
MUNTH = TU N - TU N-1
where
MUNTH = Marginal utility of nth unit
TU N = Total utility of n units
TU N-1 = Total utility of n-1 units
Concept of Utility
MU= TU
Q
where
TU= Change in Total utility
Q = Change in the Quantity of the
commodity
MU can be positive, zero , or negative .
Concept of Utility
Positive MU- If by consuming
additional units of a commodity, TU
goes on increasing then MU of these
units will be positive.
Zero MU- If the consumption of an
additional unit of a commodity
causes change in the total utility,
marginal utility of the additional unit
is zero.
Concept of Utility
Negative MU- If the consumption of an
additional unit of a commodity
causes a fall in TU, it means the
marginal utility of that unit is
negative.
Total utility - It refers to the entire
amount of satisfaction obtained from
consuming various quantities of a
commodity.
TU x = F (Q x )
Relation between TU and
MU
Quantity Total Utility Marginal Description
(units) Utility
1 8 8-0= 8 + MU,TU
increasing
2 14 14-8=6
3 18 18-14=4
4 20 20-18=2
5 20 20-20=0 0 MU, TU
maximum
6 18 18-20=-2 - MU, TU
decreasing
How is TU different from MU
?
Total utility is the sum total of utility
derived from all the units of a
commodity. Marginal utility is
additional utility when one more unit
of the commodity is consumed .
Thus, TU= MU
MU nth = TU n - TU n-1
Outcome of TU/MU
relationship
• Marginal utility tends to diminish as
more units of commodity are
consumed .However total utility
continues to increase with every
additional unit of the commodity
consumed till such point when
marginal utility becomes zero.
• Total utility generally remains
positive while marginal utility may be
zero or even negative.
Outcome of TU/MU
relationship
• Total utility becomes maximum when
marginal utility is zero.
• Marginal utility determines the rate
of change in total utility.
Outcome of TU/MU
relationship
Significance of the difference between
Total and Marginal Utility
• Paradox of Value or the Diamond-Water
Paradox: Economist assumed that the price of
a commodity was equal to its total utility.
Thus, goods which give more total utility
should have more value and goods which
have less total utility should have less value.
But its not so in real life .One obtains more TU
from water than from diamond ,yet the price
of water is far less than that of diamond. This
situation is called paradox of value.
Significance of the difference
between Total and Marginal Utility
Consumer ‘s surplus:
Sometimes a consumer is
willing to pay for
commodity more than its
actual price. The
difference (between the
price you are willing to
pay and the price you
actually pay ) is called
consumer surplus.
Approaches to Consumer Behavior
• There are two approaches of
consumer behavior:
a) Cardinal Approach- Marshallian
View
b) Ordinal Approach – Hickian View
Under Cardinal approach there are
two main laws i.e. Law of Diminishing
Marginal Utility and Law of Equi-
Marginal Utility
Law of Diminishing Marginal
Utility
• This law was given by French engineer,Gossen
According to this law, as one individual goes
on consuming a commodity ,the marginal
utility obtained from its additional unit goes on
diminishing
It is also called as Gossen’s first Law
Dr. Marshal explained “the additional benefit
which a person derives from a given increase
of his stock of thing diminishes with every
increase in the stock that he already has .”
Law of Diminishing Marginal
Utility
• According to Chapman: “ The more
we have of thing, the less we want
additional increments of it or the
more we want not to have additional
increment of it.”
• According to Samuelson : “ As the
amount consumed of a good
increases, the marginal utility of the
good leads to decreases.”
Law of Diminishing Marginal
Utility
• Assumptions
Utility can be measured in cardinal
number like 1,2,3,…n units
The utility of a commodity
depends on its own quantity rather
than the quantities of other
commodities .
The law applies only when the
commodity is continuously consumed
.
Law of Diminishing Marginal
Utility
• Assumptions
All units consumed by the consumer are
same in all respect i.e., same color, shape,
taste etc
Marginal utility of money remains
constant
There is no change in the price of the
commodity and its substitute.
There is no change in the taste ,habits
fashion of the consumer
Law of Diminishing Marginal
Utility
Law of Diminishing Marginal Utility
Exception of the Law
• Rare things
• Initial Stages
• Public Goods
• Music and Poetry
• Misers
• Discontinuous Consumption
• Drunkards
Importance of the Law
• Variety in production and
Consumption
• Basis of Socialism
• Progressive Taxation
• Basis of the law of Consumption
• Price Determination
• Advantages to Consumers
