Theory of Consumer Behaviour 

Utility Analysis 

Meaning : Utility is the want satisfying power of the commodity.

Feature :

• Utility of a good is the expected satisfaction from a commodity.
• Utility is a subjective thing.
• Utility differs from consumer to consumer.
• Utility differs from usefulness.
• Utility versus realised satisfaction -

Utility means expected satisfaction whereas realised satisfaction is the actual satisfaction derived from the consumption of a commodity.

Concepts of utility :

Total Utility (TU) -

• It refers to the entire amount of satisfaction obtained from consuming various quantities of a commodity.
• It can be expressed as follow :

TU_x = f (Q_x) 

Where TU_x = total utility from commodity x

Q_x = units of commodity x

f = function

Marginal Utility (MU) -

• It refers to the addition made to the total utility by consumption one more unit of a commodity.
• It can expressed as :

MU_n = TU_n - TU_n-1

Where MU_n = Marginal utility of n^th unit

TU_n = Total unit of n^th unit

TU_n-1 = Total unit of previous unit

• MU is a downward sloping curve.

Average Utility (AU) -

• It refers to the per unit utility of a commodity. It is obtained by dividing total utility by number of units consumed.
• It can expressed as :

AU = TU/Q

Realtionship between TU and MU :

• TU increases at an increasing rate, when MU increases.
• TU increases at a diminishing rate, when MU decreases.
• TU is maximum, when MU is zero.
• TU declines, when MU is negative.

Measurment of Utility:

Utility can be measured by using the two methods-

(a) Cardinal measurment - measuring utility in units (numbers). It was given by Alfred Marshall. Pareto an Italian Economist criticised the concept of cardinal utility later it was also supported by economist Hicks and Allen.

(b) Ordinal Measurment - measuring utility based on prefrence. (utility is subjective and immeasurable.) Based on the above methods of measuring utility, economist have given the theories of consumer behaviour utility is best measured in ordinal terms.

DMU is violeted under following cases:

• The intensity of want increases.
• The consumer comes-to-think that the intensity of ideas want has increased.

Utility Approach:

• It is also known as ''Marginal Utility Analysis " or "Cardinal measurability' of utility.
• This approach was propounded by Alfred Marshall.
• As per this approach utility can be measured in numbers.
• The units for measuring utility is called utlls.
• Utility approach is explained with the help of concepts of total utility (TU), average utility (AU) and Marginal utility (MU) (these have been already discussed).

Assumptions of utility approach:

(a) Rationality - It assumes that consumer is retional and will spend his income in that way which benefits him the most.

(b) Utility is cardinal - It can be measured in numbers.

(c) Marginal utility of money remains constant.

(d) Independent utility - The utility derived from a commodity does not depend upon quantity consumed of another commodity.

Law of utility approach :

Where will study two laws of utility

(a) Law of diminishing marginal utility.

(b) Law of equi-marginal utility

Law of diminishing marginal utility:

This law states that "as we consume more and more units of a commodity, the marginal utility fir each successive units keeps on decreasing."

 

Units of Commodity	Total Utility        (TU)	Marginal Utility      (MU)
0	0	-
1	8	8
2	14	6
3	18	4
4	20	2
5	20	0
6	18	-2

Assumptions of law of dimnishing marginal utility:

• The consumer is rational and wants to spend each unit of money in the best possible manner.
• all the units of given commodity are homogenous. i.e. identical in shape quantity, quantity etc.
• units of consumption are of reasonable size i.e. normal consumption.
• only one type of commodity is used for consumption at a time.
• Marginal utility of money is constant.
• Consumption is continuous. There is no long interval.

e.g. If you take one glass of water in the morning and second glass at noon so the marginal utility for second glass will not decline.