consumer behaviour utility analysis

7/30/2019 Consumer Behaviour Utility Analysis

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Consumer Behavior : Utility

Analysis


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Utility

Utility refers to want satisfying powerof a commodity.

In objective terms, utility may be

defined as the amount of satisfactionderived from a commodity or serviceat a particulartime.

Assumptions: Utility can be measured. Marginal Utility of money remains constant

No change in income of the consumer, his taste & fashion to beconstant

No substitute

Independent marginal utility of each unit of commodity


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Total Utility (TU) and Marginal Utility

(MU)

Total Utility refers to the total satisfaction derivedby the consumer from the consumption of agiven quantity of a good.

TU = Sum of all MU

MU refers theadditional satisfaction from one moreunit of consumption

The exponents of the utility analysis have developed two lawswhich occupy a very important place in economics theory andthey are :-

# Law of Diminishing Marginal Utility

# Law of Equi-Marginal Utility


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Cardinal utility believes that utility

could be measured & added (utility

unit & marginal analysis);

Ordinal utility holds that utility

could only be ordered and cannot be

measured (indifference curve).

Cardinal Utility& Ordinal Utility


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Law of Diminishing Marginal Utility

Though wants of an individual are unlimited in number yeteach individual want is satiable. Because of this, the morewe have a commodity, the less we want to have more of it.

This law state that as the amount consumed of a commodityincreases, the utility derived by the consumer from theadditional units, i.e marginal utility goes on decreasing.

According to Marshall, The additional benefit a personderives from a given increase of his stock of a thing

diminishes with every increase in the stock that he alreadyhas


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Law of Diminishing Marginal Utility

Explanation: As more and more quantity of a commodity is

consumed, the intensity of desire decreases and alsothe utility derived from the additional unit.

Assumptions:

All the units of a commodity must be same in allrespects

The unit of the good must be standard

There should be no change in taste during the processof consumption

There must be continuity in consumption

There should be no change in the price of thesubstitute goods


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Units of a goods

consumed

Marginal

Utility (MU)

Total

utility (TU)

1 6 6

2 4 10

3 2 12

4 0 12

5 -2 10

6 -4 6

Relationship between MU and TU


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Law of Equi-Marginal Utility

This law states that the consumer

maximizing his total utility will allocate his

income among various commodities in such

a way that his marginal utility of the lastrupee spent on each commodity is equal.

Or

The consumer will spend his money income

on different goods in such a way thatmarginal utility of each good is proportional

to its price

MU of A / P of A = MU of B / P of B


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Limitations of Law of Equi-Marginal

Utility

# It is difficult for the consumer to know the

marginal utilities from different commodities

because utility cannot be measured.

# Consumer are ignorant and therefore are

not in a position to arrive at an equilibrium.

# It does not apply to indivisible andinexpensive commodity.


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Rupee

Marginal Utility of

Apples

Marginal Utility

of Oranges

1 10 7

2 8 6

3 6 5

4 4 4

5 2 3

Equi Marginal Utility

Total Money available is Rs.5 to be spent on

Apples and Oranges. Price of both comodities

is Re.1 per unit.


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A locus of points representing different bundles

of goods and services, each of which yields

the same level of total utility.

Indifference curve


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0

2

4

6

8

10

12

14

16

18

20

22

24

26

28

30

0 2 4 6 8 10 12 14 16 18 20 22

a

Pe

ars

Oranges

Pears

3024

20

14

10

8

6

Oranges

67

8

10

13

15

20

Point

ab

c

d

e

f

g

Constructing an indifference curve


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0

10

20

30

0 10 20

Deriving the marginal rate of substitution

(MRS)a

b

Unitso

fgoodY

Units of good X

26

6 7


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0

10

20

30

0 10 20

a

b

Unitso

fgoodY

Units of good X

26

6 7

DY= 4

DX= 1

MRS= 4


(MRS)


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0

10

20

30

0 10 20

a

b

Unitso

fgoodY

Units of good X

26

6 7

cd

DY= 4

DX= 1

DY =1

DX= 1

MRS= 1

MRS= 4

13 14

9


(MRS)


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0

10

20

30

0 10 20

Unitso

fgoodY

Units of good X

I1I2

I3

I4

I5

An indifference map


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Unitso

fgoodY

Units of good X

a

b

Units of

good X

0

5

10

15

Units of

good Y

30

20

10

0

Point on

budget line

a

b

Assumptions

PX=2

PY= 1

Budget = 30

0

10

20

30

0 5 10 15 20

A budget line

ff f i i i h


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0

10

20

30

40

0 5 10 15 20

Unitso

fgoodY

Units of good X

Assumptions

PX=2PY= 1

Budget = 40

16

7

m

n

Budget

= 40

Budget

= 30

Effect of an increase in income on the

budget line


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0

10

20

30

0 5 10 15 20 25 30

Effect on the budget line of a fall in the price

of good X

Unitso

fgoodY

Units of good X

Assumptions

PX=1PY= 1

Budget = 30

B1 B2

a

b c


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I1I2

I3

I4

I5

Unitsof

goodY

O

Units of good X

Budget line

Finding the optimum consumption

S l f i diff d


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I1I2

I3

I4

I5

Unitsof

goodY

O

Units of good X

r

s

tY1

X1

v

u

Same slope at tof indifference curve and

budget line

Eff i f h i i


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Unitsof

goodY

O

Units of good X

B1

Effect on consumption of a change in income

I1

Eff t ti f h i i


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I2

Unitsof

goodY

O

Units of good X

B1 B2 I1


Eff t ti f h i i


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I2

Unitsof

goodY

O

Units of good X

B1 B2 B3 B4 I1

I3

I4


Eff t ti f h i i


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I2

Unitsof

goodY

O

Units of good X

B1 B2 B3 B4 I1

I3

I4

Incomeconsumption curve



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0

10

20

30

0 5 10 15 20 25 30

Effect of a fall in the price of goodX

Unitso

fgoodY

Units of good X

Assumptions

PX=2PY= 1

Budget = 30

B1 I1

j


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0

10

20

30

0 5 10 15 20 25 30

Unitso

fgoodY

Units of good X

Assumptions

PX=1PY= 1

Budget = 30

B1 I1

j

I2

B2

k

Effect of a fall in the price of goodXa


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0

10

20

30

0 5 10 15 20 25 30

Unitso

fgoodY

U i f d X

B1 I1

j

I2

B2

k

Priceconsumption curve

Effect of a fall in the price of goodXa

consumer behaviour utility analysis

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