CONSUMER BEHAVIOUR

In economics, utility refers to the satisfaction or pleasure that individuals receive from
consuming goods and services. It represents the value or benefit derived from the use of a
product or service and is subjective, meaning it can vary from person to person based on their
preferences, needs, and desires.
Utility is often considered as a measure of happiness or well-being. The concept is crucial in
understanding consumer behavior, as it helps explain why people make choices based on their
preferences and the perceived value of different options.

Features:
1. Subjective Nature: Utility is subjective and varies from person to person. Different
individuals may derive different levels of satisfaction from the same product based on
personal tastes, experiences, and needs.
2. Marginal Utility: Marginal utility refers to the additional satisfaction or benefit gained
from consuming one more unit of a good or service. According to the law of diminishing
marginal utility, as a person consumes more units of a product, the satisfaction derived
from each additional unit decreases.
3. Total Utility: Total utility is the total satisfaction or benefit derived from consuming a
certain quantity of a good or service. It increases with more consumption, but at a
decreasing rate due to diminishing marginal utility.
4. Variety of Types:
5. Cardinal Utility: This assumes that utility can be measured and quantified numerically
(e.g., in terms of units).
6. Ordinal Utility: This assumes utility cannot be measured numerically but can be ranked
in terms of preference (e.g., a person prefers product A to product B, but not how much
more they prefer it).
7. Utility is Measurable in Different Ways: Some economists believe utility can be
quantified, while others argue it should only be ranked in order of preference. The
cardinal utility approach (measuring exact satisfaction levels) contrasts with the ordinal
utility approach (ranking preferences).
8. Utility Affects Demand: Utility is a key factor in determining demand. The greater the
utility a person derives from a good or service, the more likely they are to demand it.
Consumers make choices based on which goods or services will maximize their utility.
Difference between total and marginal utility:
LAW OF DIMINISHING MARGINAL UTILITY:

The Law of Diminishing Marginal Utility states that as a person consumes more units of a good
or service, the additional satisfaction (or utility) gained from each additional unit decreases,
assuming all other factors remain constant. In other words, the more of a good you consume,
the less satisfaction you derive from each additional unit after a certain point.
Key Concepts:
 Marginal Utility: The additional satisfaction or benefit derived from consuming one
more unit of a good or service.
 Diminishing: The gradual reduction in the amount of satisfaction as more units are
consumed.
Explanation:
When you consume a good for the first time, the initial units often provide high satisfaction or
utility. However, as you consume more, the added satisfaction from each extra unit begins to
decline. For example, if you are thirsty, the first glass of water will provide a great deal of
satisfaction, but the second glass will provide less satisfaction, and by the time you have
consumed several glasses, the additional satisfaction (marginal utility) from each further glass
decreases significantly.
Example:
1. First slice of pizza: After a long day of work, the first slice gives you high satisfaction
(e.g., 10 units of utility).
2. Second slice of pizza: The second slice still brings satisfaction, but it’s slightly less than
the first (e.g., 7 units of utility).
3. Third slice of pizza: By the third slice, you are starting to feel full, and the satisfaction is
even lower (e.g., 4 units of utility).
4. Fourth slice of pizza: At this point, you may not feel much satisfaction or even feel
discomfort, with a low or negative marginal utility (e.g., 1 or even negative utility).
Assumptions of the Law of Diminishing Marginal Utility:
1. Constant consumption environment: The law assumes all other factors (like price,
consumer income, and preferences) remain constant while consumption increases.
2. Homogeneity : The consumer consumes the same good or service, not varying the
product.
 3. Rational behavior: The consumer acts rationally, making choices to maximize total
utility.
4. Single use
5. Reasonability
Significance:
 Consumer Choice: It helps explain consumer behavior and decision-making. As the
marginal utility of a good decreases, the consumer may shift their consumption to other
goods that offer higher satisfaction.
 Pricing: This law also influences pricing strategies. Products with diminishing marginal
utility tend to be priced lower in markets because consumers' willingness to pay
decreases as they consume more.
 Allocation of Resources: The law explains how consumers allocate their income or
resources to maximize their total utility by consuming a variety of goods instead of just
one.
Exception:
1. Hobbies
2. Money
3. Music
4. Miser
5. Addiction
6. Power
7. Reading
Conclusion:
The Law of Diminishing Marginal Utility is a fundamental principle in economics that highlights
the decreasing satisfaction or utility derived from each additional unit of a good or service
consumed. This behavior has significant implications for consumer decision-making and the
understanding of demand in markets.
LAW OF EQUI MARGINAL UTILITY

The Law of Equi-Marginal Utility, also known as the Law of Substitution, is an important concept
in consumer theory in economics. It states that a consumer will maximize their total utility by
allocating their income in such a way that the marginal utility per unit of currency spent on each
good or service is the same across all goods or services. In simpler terms, the consumer
achieves maximum satisfaction when the ratio of the marginal utility to the price of all goods is
equal.

Key Idea:

 A rational consumer, aiming to maximize total utility, will distribute their budget across
various goods and services in such a way that the marginal utility of the last unit of
money spent on each good is equal.

Explanation:

When a consumer has a fixed budget to spend on several goods, they seek to maximize their
overall satisfaction (utility) by ensuring that the marginal utility derived from spending the last
unit of money on each good is the same. If the marginal utility per unit of money spent on one
good is higher than for another, the consumer will shift spending to the good providing more
marginal utility until equilibrium is achieved.

Assumptions of the Law of Equi-Marginal Utility:

1. Rational Behavior: The consumer behaves rationally to maximize utility.

2. Fixed Income: The consumer has a fixed budget that they need to allocate across various
goods and services.
3. Price of Goods: Prices of goods and services are given and do not change as the
consumer purchases them.
4. Diminishing Marginal Utility: The marginal utility of a good or service decreases as more
units are consumed.

Example:

Assume you have a budget of $50 to spend on two goods—apples and bananas:

 Price of apples: $5 per apple

 Price of bananas: $2 per banana
 Marginal Utility of Apples: 20 units per apple
 Marginal Utility of Bananas: 8 units per banana
Importance of the Law of Equi-Marginal Utility:

1. Optimal Consumption: This law helps explain how consumers allocate their resources
optimally across different goods and services to achieve the highest level of satisfaction.
2. Consumer Decision-Making: It shows the principle behind consumer choice theory and
how they make decisions when faced with limited income.
3. Budget Allocation: It guides consumers in distributing their budget across various goods
to get the maximum benefit from their spending.

Conclusion:

The Law of Equi-Marginal Utility explains that a rational consumer allocates their income in
such a way that the marginal utility per unit of money spent on all goods is equal. By doing so,
they ensure that they derive the maximum possible satisfaction from their limited income,
providing a fundamental principle in understanding consumer behavior and decision-making in
economics.
Ordinal utility is a concept from economics that refers to a way of ranking preferences
without assigning specific numerical values to those preferences. It contrasts with cardinal
utility, which assigns numerical values to preferences, allowing for precise comparisons of the
magnitude of satisfaction or utility derived from different goods or outcomes.

Example:
Consider three goods: apples (A), bananas (B), and cherries (C). Suppose a person prefers
apples to bananas and bananas to cherries. An ordinal utility function for this situation might
assign the following rankings:
 Apple (A) = 1
 Banana (B) = 2
 Cherry (C) = 3
This shows that the person ranks apples highest, bananas next, and cherries last. However, we
don't know by how much the person prefers apples over bananas (whether it's a lot or just a
little), and the specific numerical values are not as important as the order of preferences.

Key Features of Ordinal Utility:

1. Ranking Preferences: Ordinal utility only tells us the relative preference between
different options. For example, if a person prefers option A to option B, we know A is
better, but we don't know by how much. It simply ranks the options in order of
preference.
2. No Measurement of Intensity: Unlike cardinal utility, ordinal utility does not measure
the strength of preference or satisfaction. If someone prefers A to B and B to C, we
know that A is preferred to C, but we don't know how much more they like A compared
to B or C.
3. Indifference: If a person has the same preference for two options, they are said to be
indifferent between them. In terms of ordinal utility, this means both options hold the
same rank.
4. Utility Function Representation: Ordinal utility can be represented by a utility function
that assigns values to different bundles or options in such a way that higher values
correspond to more preferred options. However, these values are not meaningful
beyond the fact that they reflect a preference ranking.
 Indifference curve
An indifference curve is a fundamental concept in microeconomics, used to represent the
different combinations of two goods that give a consumer the same level of satisfaction or
utility. The consumer is indifferent between these combinations, meaning they derive the same
utility from each.
Key Characteristics of Indifference Curves:
1. Downward Sloping:
o Indifference curves typically slope downward from left to right. This reflects the
trade-off between the two goods. As you give up some quantity of one good, you
must gain more of the other to keep your level of satisfaction constant.
2. Convex to the Origin:
o Indifference curves are usually convex to the origin, meaning they bend inward
toward the origin. This convexity represents the principle of diminishing marginal
rate of substitution (MRS): as you consume more of one good, you are willing to
give up less of the other good to maintain the same level of satisfaction.
3. Higher Curves Represent Higher Utility:
o Indifference curves that lie farther from the origin represent higher levels of
utility. This is because as the consumer has more of both goods (or more of one
good and less of another in an optimal ratio), their overall satisfaction increases.
4. Non-Intersecting:
o Indifference curves never intersect. If two indifference curves were to intersect,
it would imply that the consumer is indifferent between two different levels of
satisfaction, which contradicts the assumption that higher curves represent
higher utility.
5. Each Curve Represents a Specific Utility Level:
o Every indifference curve corresponds to a specific level of utility, and every point
on that curve indicates a combination of the two goods that provides the same
satisfaction.
Example:
Consider a consumer who enjoys two goods: apples (A) and bananas (B). Suppose the
consumer is equally satisfied with the following combinations:
 4 apples and 6 bananas,
 5 apples and 4 bananas,
 6 apples and 2 bananas.
All of these combinations form an indifference curve, meaning the consumer derives the same
utility from each combination. If you plot these points on a graph with apples on the x-axis and
bananas on the y-axis, you would see a curve that connects them.
 Multiple choice questions

1. Which of the following is the main assumption behind the concept of utility in consumer
behavior?
a) Utility is measured in absolute terms.
b) Utility is subjective and can vary from person to person.
c) Utility is constant regardless of the consumer's preferences.
d) Utility is always measured in monetary terms.
Answer: b) Utility is subjective and can vary from person to person.

2. What does the law of diminishing marginal utility state?

a) As a consumer consumes more of a good, the total utility increases.
b) As a consumer consumes more of a good, the marginal utility of each additional unit
decreases.
c) Marginal utility never decreases.
d) Total utility remains constant regardless of consumption.
Answer: b) As a consumer consumes more of a good, the marginal utility of each additional
unit decreases.

3. If a consumer is maximizing their utility, what must be true?

a) The marginal utility per dollar spent on each good must be equal.
b) The total utility is maximized, but marginal utility is not considered.
c) The consumer should always buy the good with the highest total utility.
d) Marginal utility is maximized.
Answer: a) The marginal utility per dollar spent on each good must be equal.

4. An indifference curve represents:

a) The total utility a consumer gets from a combination of goods.
b) The quantity of one good the consumer is willing to give up for another, maintaining the
same level of satisfaction.
c) The combination of goods that a consumer is indifferent to in terms of price.
d) The consumer’s income level.
Answer: b) The quantity of one good the consumer is willing to give up for another,
maintaining the same level of satisfaction.

5. The marginal rate of substitution (MRS) is:

a) The rate at which a consumer is willing to trade one good for another while maintaining the
same level of utility.
b) The slope of the budget line.
c) The rate at which the total utility of the consumer increases.
d) The quantity of one good consumed by the consumer.
Answer: a) The rate at which a consumer is willing to trade one good for another while
maintaining the same level of utility.

6. Which of the following best describes the shape of an indifference curve?

a) A straight line.
b) A convex curve that bends toward the origin.
c) A convex curve that bends away from the origin.
d) A horizontal line.
Answer: b) A convex curve that bends toward the origin.

7. Indifference curves cannot intersect because:

a) It would imply that the consumer has inconsistent preferences.
b) It is physically impossible to do so.
c) It would mean that the total utility is negative.
d) Indifference curves always have a positive slope.
Answer: a) It would imply that the consumer has inconsistent preferences.

8. Which of the following is NOT a property of indifference curves?

a) They slope downward.
b) They are convex to the origin.
c) They can never intersect.
d) They have a positive slope.
Answer: d) They have a positive slope.
9. If two goods are perfect substitutes, the indifference curve will be:
a) Steep and upward sloping.
b) A straight line with a positive slope.
c) A convex curve.
d) A straight line with a negative slope.
Answer: b) A straight line with a positive slope.

10. Which of the following would cause a shift in a consumer's indifference curve?
a) A change in the price of the goods.
b) A change in the consumer's income.
c) A change in consumer preferences.
d) A change in the budget constraint.
Answer: c) A change in consumer preferences.

11. Total utility refers to:

a) The additional satisfaction derived from consuming one more unit of a good.
b) The total amount of satisfaction a consumer derives from all units of a good consumed.
c) The amount of satisfaction derived from consuming the first unit of a good.
d) The marginal utility of the last unit consumed.
Answer: b) The total amount of satisfaction a consumer derives from all units of a good
consumed.

12. In the case of perfect complements, the indifference curve is:

a) Steep and upward sloping.
b) A straight line with a positive slope.
c) L-shaped.
d) A straight line with a negative slope.
Answer: c) L-shaped.

13. A consumer's optimal choice occurs where:

a) The total utility is maximized.
b) The marginal utility per dollar spent is equal across all goods.
c) The budget line is tangent to the indifference curve.
d) Both b and c are correct.
Answer: d) Both b and c are correct.

14. If a consumer is on an indifference curve and moves to a higher indifference curve, this
indicates:
a) The consumer's total utility has decreased.
b) The consumer's utility has remained the same.
c) The consumer's total utility has increased.
d) The consumer is less satisfied with the new combination of goods.
Answer: c) The consumer's total utility has increased.

15. The budget line shows:

a) The combinations of goods that the consumer can afford given their income and the prices of
the goods.
b) The maximum utility the consumer can achieve.
c) The optimal combination of goods.
d) The marginal rate of substitution between two goods.
Answer: a) The combinations of goods that the consumer can afford given their income and
the prices of the goods.

16. What happens when a consumer moves along an indifference curve?

a) The total utility changes.
b) The marginal utility of each good changes.
c) The consumer’s satisfaction remains constant.
d) The consumer's budget constraint is satisfied.
Answer: c) The consumer’s satisfaction remains constant.

17. The principle of diminishing marginal utility suggests that:

a) The more of a good a consumer consumes, the greater the satisfaction.
b) The more of a good a consumer consumes, the less satisfaction they get from each additional
unit.
c) Total utility increases at an increasing rate.
d) Consumers will always consume equal amounts of all goods.
Answer: b) The more of a good a consumer consumes, the less satisfaction they get from each
additional unit.

18. The marginal rate of substitution is calculated by:

a) Dividing the marginal utility of one good by the marginal utility of the other good.
b) Subtracting the utility of one good from the utility of the other good.
c) Multiplying the marginal utility of both goods.
d) Dividing the total utility of one good by the total utility of the other good.
Answer: a) Dividing the marginal utility of one good by the marginal utility of the other good.

19. If the price of a good falls, the consumer's budget line will:
a) Shift outward, allowing the consumer to buy more of both goods.
b) Shift inward, reducing the consumer’s purchasing power.
c) Remain unchanged.
d) Become steeper.
Answer: a) Shift outward, allowing the consumer to buy more of both goods.

20. Which of the following is true about perfect substitutes?

a) They have convex indifference curves.
b) The indifference curve is a straight line with a negative slope.
c) The consumer is willing to trade one good for the other at a fixed rate.
d) The consumer will never be willing to trade one good for the other.
Answer: c) The consumer is willing to trade one good for the other at a fixed rate

Answer in one sentence

1. What does the law of diminishing marginal utility state?
Answer: As a consumer consumes more of a good, the marginal utility of each additional unit
decreases.

2. What does an indifference curve represent?

Answer: An indifference curve shows combinations of two goods that give a consumer the
same level of satisfaction.

3. What is the marginal rate of substitution (MRS)?

Answer: MRS is the rate at which a consumer is willing to substitute one good for another while
keeping utility constant.

4. What does the shape of an indifference curve typically look like?

Answer: Indifference curves are typically convex to the origin.

5. What happens when a consumer moves along an indifference curve?

Answer: Moving along an indifference curve means the consumer’s satisfaction remains
constant.

6. If two goods are perfect substitutes, what will their indifference curve look like?
Answer: The indifference curve for perfect substitutes will be a straight line with a constant
negative slope.

7. What is the principle of diminishing marginal utility?

Answer: The principle states that as a person consumes more of a good, the additional
satisfaction from each extra unit decreases.

8. What happens when an indifference curve shifts outward?

Answer: An outward shift of the indifference curve indicates an increase in the consumer’s total
utility.

9. What is the condition for utility maximization?

Answer: Utility is maximized when the marginal utility per dollar spent is equal across all goods.

10. What is the relationship between total utility and marginal utility?
Answer: Total utility increases as long as marginal utility is positive, and marginal utility
decreases as total utility increases.

11. Which of the following is true about indifference curves?

Answer: Indifference curves cannot intersect because it would imply inconsistent preferences.

12. What does the budget line represent?

Answer: The budget line represents the combinations of goods a consumer can afford given
their income and the prices of the goods.

13. What does an L-shaped indifference curve represent?

Answer: An L-shaped indifference curve represents perfect complements, where goods are
consumed in fixed proportions.

14. If a consumer is maximizing utility, what must be true?

Answer: The consumer’s budget line must be tangent to the highest possible indifference
curve.

15. What happens when the price of a good decreases?

Answer: A decrease in price shifts the budget line outward, allowing the consumer to purchase
more of both goods.

16. What is the relationship between indifference curves and total utility?
Answer: Higher indifference curves represent higher levels of total utility.

17. What is the slope of the indifference curve called?

Answer: The slope of the indifference curve is called the marginal rate of substitution (MRS).

18. What does a higher indifference curve indicate?

Answer: A higher indifference curve indicates a higher level of utility or satisfaction.

19. If the price of a good increases, what happens to the budget line?
Answer: An increase in the price of a good makes the budget line steeper, reducing the amount
of that good the consumer can afford.

20. What happens to the consumer’s choice when the budget constraint changes?
Answer: A change in the budget constraint alters the consumer’s choice by affecting the
combination of goods they can afford.