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Unit-3-Part-4-Consumer Behaviour-Eco

The document discusses the law of diminishing marginal utility. It states that as consumption of a good increases, the additional utility from each additional unit consumed decreases. This is because the first few units of a good provide more satisfaction than later units. The law is represented mathematically and graphically, with total utility increasing at a decreasing rate and marginal utility declining continuously. There are some assumptions of the law and exceptions are noted for rare goods or those relating to habits/addictions.

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Fagun Sahni
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85 views17 pages

Unit-3-Part-4-Consumer Behaviour-Eco

The document discusses the law of diminishing marginal utility. It states that as consumption of a good increases, the additional utility from each additional unit consumed decreases. This is because the first few units of a good provide more satisfaction than later units. The law is represented mathematically and graphically, with total utility increasing at a decreasing rate and marginal utility declining continuously. There are some assumptions of the law and exceptions are noted for rare goods or those relating to habits/addictions.

Uploaded by

Fagun Sahni
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Consumer Behaviour

By Ms. Stuti Jain


Symbiosis Law School, Noida

S
Utility- Concept

S  Degree of satisfaction arises from the consumption of a commodity

S  Satisfying power

S  Subjective

S  Not measurable

S  Relative

S  Different from usefulness

S  No ethical, moral or legal connotations


Marginal Utility

S  Total Utility is an aggregate measure of satisfaction gained from


consumption

S  Marginal Utility is the change in total utility due to a one-unit


change in the level of consumption.

S  Marginal Utility is a measure of the change in satisfaction gained


from consumption as a result of a change in consumption.

S  MU(x) = TU(x) – TU(x – 1)


Cardinal & Ordinal Utility

S  Cardinal Utility- utility derived from the consumption of


any commodity is measured by cardinal numbers like
1,2,3,4 etc.

S  Ordinal Utility- Utility derived from the consumption of


any commodity can be measured by ordinal numbers like
1st, 2nd, 3rd, 4th etc. Ranking is done.
Law of DMU

https://www.youtube.com/watch?v=_c9BN-foqwk
An Analogy

S  John is extremely hungry and goes to a restaurant that offers a buffet.


He loads up his plate with food and starts eating. The amount of
satisfaction gained by John from a plate of food is directly
proportional to John’s hunger level. Therefore, the first plate of food
will give John more satisfaction (utility) than the second plate of food,
which in turn will give John more satisfaction than the third plate of
food.

S  The situation above occurs because each plate of food reduces John’s
hunger level. The reduction in hunger level results in less satisfaction
from the plate of food being consumed. Each plate of food fills John
up and thus lessens the amount of satisfaction he will get from the
plates of food that follow.
Gossen’s First Law

S  Discussed experience explained by Austrian Economist


Gossen. Law is also called “Gossen’s First Law”.

S  Now called Law of Diminishing marginal Utility


LAW OF DIMINISHING
MARGINAL UTILITY

S  The Law of Diminishing Marginal Utility states that the


additional utility gained from an increase in consumption
decreases with each subsequent increase in the level of
consumption.

S  Marginal Utility is the change in total utility due to a one-unit


change in the level of consumption.

S  The Law of Diminishing Marginal Utility states the marginal


utility gradually decreases with the level of consumption.
Mathematical Representation

Amount of food Total Utility Marginal Utility


Consumed
1 plate 20 20
2 plate 35 15
3 plate 45 10
4 plate 50 5
5 plate 50 0
6 plate 45 -5
Diagrammatic Representation
Interpretation

S  TU is the total utility curve and MU is the marginal utility


curve

S  TU increases, reaches a maximum level and then starts


decreasing

S  MU falls continuously

S  MU reaches zero when TU is maximum

S  When TU starts falling, MU becomes negative


Mathematical
Interpretation

S  The law of diminishing marginal utility states the utility


function is upward sloping and concave.

S  For instance, one can read off the graph that 3.5 plates of
food give the consumer 27.5 units of utility. If we assume a
continuous utility function, then the marginal utility from
the xthunit of consumption is simply the slope (or derivative)
of the total utility function at x units.
Assumptions- Law of DMU

S  Utility can be measured in cardinal numbers like 1,2, 3, etc. called “Utils”.

S  Utilities of different commodities are independent of one another.

S  Marginal Utility of money remains constant.

S  From one’s own experience, it is possible to draw inferences about another


person.

S  Units of commodity must be of uniform quality, size and no time gap


between consumption of successive units.

S  No change in the fashion, tastes, price of commodity or substitutes.


Exceptions

S  Case of rare paintings, antiques etc.

S  Case of Drunkards, good books, music & poetry etc.

S  Case of public goods

S  Ignores the relation of complementarity.


Consumer Equilibrium- Law of
DMU

S  Consumer is able to maximize his utility out of his expenditure with


the help of this law.

S  Consumer will purchase that much quantity of the commodity at a


given price which maximizes his total utility.

S  MuX = PX

Where,

Mux = Marginal utility of commodity X

Px = Price of commodity X

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