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CHAPTER 1 THEORY OF CONSUMER BEHAVIOUR
Structure
1.0 Objectives
1.1 Introduction
1.2 Meaning of Utility
1.2.1 Cardinal versus Ordinal Utility
1.2.2 Total and Marginal Utility
1.3 Law of Diminishing Marginal Utility
1.4 Law of Equi-Marginal Utility Analysis
1.5 Exercises
1.6 Some Useful Books
1.0 Objectives
▪ To know the concept of utility
▪ To understand the relationship between total utility and marginal utility
▪ To analyse the law of diminishing marginal utility
▪ To comprehend the law of Equi-marginal utility
1.1 Introduction
There are three approaches to analyse consumer behavior.
1. Marginal Utility Approach
2. Indifference Curve Approach
3. Revealed Preference Approach
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1.2 Meaning of Utility
Utility is power of a commodity to satisfy human wants. It is subjective and introspective
concept. It is subjective and relative concept. It varies with persons, time and places. It is not
internal quality of a commodity rather the mental makeup of a person and intensity of wants that
determine the amount of satisfaction a person derives from a commodity at particular place and at
particular time period. For example, some people like cold drink while others do not like same
way. Secondly, utility is different from usefulness. A commodity may not be useful; it may have
utility for some people. For example, liquor is harmful for health; it may have high utility for
alcoholic. Further, utility has no moral or legal significance. It is ethically neutral.
1.2.1 Cardinal and Ordinal Utility
There are two approaches to measure utility. Cardinalists (neo-classicists) assume that
utility is measurable and quantifiable entity. It can be measured in numerical terms and hence can
be compared. Prof. Asimakipulas said that cardinal utility function makes it possible to measure
utility, at least conceptually, in the same manner that thermometers measures temperature or scales
measure mass. The units of measurement are imaginary; they are called units or utils. If the utility
of an apple is 40 utils and that of orange is 20 utils, then we can say that apple has twice as much
utility as orange. Since utils is an imaginary unit, it may not be used for empirical purpose, Marshal
suggested to measure utility in terms of money. He said that the amount of money a person is ready
to pay to obtain a unit of a commodity is utility of that commodity.
The proponents of ordinal school like Allen and Hicks argue that utility derived from a
commodity cannot be measured, much less compared. One can simply say that apple gives more
utility than orange. One cannot say by how much amount, apple gives more utility than orange.
Thus, according to this approach, we can order or rank utility derived from different commodities
but cannot quantify it.
1.2.2 Total Utility and Marginal Utility
Total utility is the amount of utility derived from the consumption of all the units of a
commodity. In other words, total utility is sum of utility derived from each unit of a commodity
consumed. For example, if the consumer consumes n units of a commodity, total utility will be
aggregate of utilities derived from all the n units of that commodity.
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Total utility = U + U +U + ------- + U
1 2 3 n
Where U , U etc are utilities derived from different units of commodity.
1 2
Marginal utility is utility derived from last unit of a commodity consumed. It refers to
change in total utility brought about by one unit change in amount of that commodity. It is
measured by difference between total utility of n units and total utility of n-1 units of a commodity.
Marginal Utility (MU) = Total utility of n units of a commodity − Total utility of n − 1 units of a commodity
This definition or method of measurement is valid when amount of commodity is changed
by one unit. However, if amount changes not by one unit but by different units, we define marginal
unit as the rate of change in total utility caused by small given change in quantity of that
commodity. It is measured as ratio of change in total utility and change in amount of commodity.
Marginal Utility (MU) = change in total utility
change in amount of commodity
MU = dUx
x
dQx
Here MUx represents the marginal utility of commodity x; dUx represents change in total
utility of x; and dQ stands for change in amount of commodity x.
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Relationship between Total Utility and Marginal Utility
i. So long as marginal utility is positive, total utility increases.
ii. When marginal utility is zero, total utility reaches maximum. This is called point
of satiety.
iii. When marginal utility is negative, total utility declines.
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Figure: 1.1: Relationship between Total Utility and Marginal Utility
Table 1.1: Relationship between Total Utility and Marginal Utility
Total Utility Marginal Utility
Units of commodity No. of (TU) (MU)
mangoes
1 8 8
2 14 6
3 16 2
4 16 0
5 14 (-) 2
The relationship between total utility and marginal utility has been shown in the above table 1.1
rd
and figure 1.1. The table shows that unit 3 unit of commodity the marginal utility is positive and
total utility increases from 3 to 16. At 4th unit, marginal utility is zero and total utility is maximum.
After 4th unit, marginal unit becomes negative and total utility declines from 16 to 14. Same
relationship has been shown in figure 1.1.
1.3 Law of Diminishing Marginal Utility
A psychological generalisation that the perceived value of, or satisfaction gained from, a
good to a consumer declines with each additional unit acquired or consumed. Even the most
delicious food, for example, will appeal less and less to its consumer when he or she has had
enough, and if consumption continues, sickness (disutility) will result.
The law can be traced back to the writings of Gossen and Bentham. It was, however,
William Stanley Jevons who for the first time projected its bearing on the determination of value.
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