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Utility and Consumer Behaviour

Utility is the satisfaction a consumer gains from goods or services, influencing their spending decisions. There are two main approaches to studying utility: Cardinal Utility, which measures satisfaction in 'utils', and Ordinal Utility, which ranks preferences without numerical values. Consumer equilibrium is achieved when the budget line is tangent to the highest indifference curve, indicating optimal consumption choices.

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2 views2 pages

Utility and Consumer Behaviour

Utility is the satisfaction a consumer gains from goods or services, influencing their spending decisions. There are two main approaches to studying utility: Cardinal Utility, which measures satisfaction in 'utils', and Ordinal Utility, which ranks preferences without numerical values. Consumer equilibrium is achieved when the budget line is tangent to the highest indifference curve, indicating optimal consumption choices.

Uploaded by

doris.kanaiza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Utility and Consumer Behaviour

Introduction to Utility

Utility refers to the satisfaction or pleasure that a consumer derives from consuming a good or service.

The concept of utility helps explain how consumers make decisions to allocate their limited income among

various goods and services.

There are two main approaches to studying utility:

1. Cardinal Utility (measurable in numbers)

2. Ordinal Utility (ranked preferences without exact numbers)

Cardinal Utility Approach

1. Cardinal Utility Approach:

This approach assumes utility can be measured in 'utils' (imaginary units of satisfaction).

Key Concepts:

- Total Utility (TU): The total satisfaction from consuming a certain quantity of a good.

- Marginal Utility (MU): The additional satisfaction from consuming one more unit.

Law of Diminishing Marginal Utility:

As more units of a good are consumed, the marginal utility derived from each additional unit tends to decline.
Utility and Consumer Behaviour

Ordinal Utility Approach

2. Ordinal Utility Approach:

This approach does not measure utility in numbers but ranks preferences.

It uses Indifference Curves and Budget Lines to determine consumer equilibrium.

- Indifference Curve: Shows combinations of two goods that give the consumer equal satisfaction.

- Budget Line: Represents all combinations of two goods a consumer can afford given income and prices.

Consumer Equilibrium occurs where the budget line is tangent to the highest possible indifference curve.

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