Dr Monika Jain

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 In economics the study of consumer behaviour occupies
an important place

 The problem of a consumer consists of three things: (a)

the object, (b) the constraints, and (c) the decision
variable

 Object – To maximize total utility (Satisfaction)

 Constraint – Limited Resources (Income)

 Decision Variable – the quantity purchased using limited

resources
 Individual preferences determine the amount
of pleasure people derive from the goods and
services they consume.
 Consumers face constraints or limits on their

choices.
 Consumers maximize their well-being or

pleasure from consumption, subject to the

constraints they face.

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 -Why do we buy goods?
 In order to gain utility
 Utility – Utility means the satisfaction obtained from
consuming a commodity. Utility is the ability or the power of
goods or services

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CARDINAL APPROACH -
ORDINAL APPROACH –
Utility is measurable and
by placing a number of -Utility is not measurable
alternatives where the but it can be compared.
utility can be added. The -Uses the ranking of
index used to meansure alternatives as first,
utility is called utils. second, third and so on.
 Ordinal ranking gives information about the
order in which a consumer ranks baskets
 E.g. a consumer may prefer A to B, but we
cannot know how much more she likes A to B
 Cardinal ranking gives information about the
intensity of a consumer’s preferences.
 We can measure the strength of a consumer’s
preference for A over B.

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Example: Consider the result of an exam

• An ordinal ranking lists the students in order of their

performance
E.g., Harry did best, Sean did second best, Betty did
third best, and so on.

• A cardinal ranking gives the marks of the exam, based on

an absolute marking standard
E.g. Harry got 90, Sean got 85, Betty got 80, and so on.

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 Cardinal Utility analysis and Ordinal Utility Analysis

Utility Analysis

Cardinal Utility Ordinal Utility Analysis

analysis

• Alfred Marshal • J. R. Hicks & R.G.D. Allen

• can be measured •Cannot be measured but
• ‘Utils’ compared as rank
• Law of Diminishing Marginal Indifference Curve analysis
Utility
•Law of Equi-marginal Utility
CARDINAL APPROACH
TOTAL UTILITY AND MARGINAL UTILITY.
Total utility is the total satisfaction that a person derives
from the consumption of certain goods and services. As
quantity increases, total utility increases.
Marginal utility is the additional total utility derived from

consuming one more unit of the same kind of goods or

services.
Marginal utility (MU) = CHANGE IN TOTAL UTILITY

 CHANGE IN TOTAL QUANTITY

Marginal Utility = Change in total utility
Change in number of
units consumed
MU = ∆TU/∆Q

10
Utils

150
Marginal
utility
100
Total
Utility
50

0
First Slice Second Slice Pizza

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 Total Utility(TU) and Marginal Utility(MU)

Unit of Total Marginal

•Total Utility is the sum utility derived Mango Utility Utility
from the consumption of bundle of 1 10
commodity 2 20
3 29
4 37
5 43
•Marginal Utility is the rate of change
6 48
of TU from one more unit of extra
7 51
consumption
8 52
MUn = TUn – TUn- 9 52
1
10 50
MU =∆TU/∆Q
 Total Utility(TU) and Marginal Utility(MU)

Unit of Total Marginal

•Total Utility is the sum utility Mango Utility Utility
derived from the consumption of 1 10 10
bundle of commodity 2 20 10
3 29 9
4 37 8
5 43 6
•Marginal Utility is the rate of
6 48 5
change of TU from one more unit of
7 51 3
extra consumption
8 52 1
9 52 0
MUn = TUn – TUn-
1 10 50 -2
MU =∆TU/∆Q
 Definition
of Law of Diminishing Marginal Utility
The law of diminishing marginal utility states that
‘as a consumer consumes more and more
units of a specific commodity,
Marginal utility from the successive units
goes on diminishing’.
• Mr. H. Gossen, a German economist, was the first to
explain this Law in 1854.
• Alfred Marshall later on restated this Law as follows:
“The additional benefit which a person derives from an
increase of his stock of a thing diminishes with every
increase in the stock that he already has”.
 Explanation and
Example of Law of
Diminishing Marginal Utility:
 Suppose, a man is very thirsty. He goes to the
market and buys one glass of sweet water.
The glass of water gives him
immense pleasure or we say the first
glass of water has great utility for him.
 If he takes second glass of water after that,
the utility will be less than that of the first
one
 If he drinks 3rd glass of water the utility
declines again and so on….
Schedule of Law of Diminishing Marginal Utility
Units Total Utility Marginal Utility
1st glass 20 20
2nd glass 32 12
3rd glass 40 8
4th glass 42 2
5th glass 42 0
6th glass 39 -3
From the above table, it is clear that in a given span of time, the first glass of water to a thirsty
man gives 20 units of utility. When he takes second glass of water, the marginal utility goes on
down to 12 units; When he consumes fifth glass of water, the marginal utility drops down to zero
and if the consumption of water is forced further from this point, the utility changes into disutility
(-3).
 Curve/Diagram
of Law of Diminishing Marginal Utility:

In the figure (2.2), along OX we measure units of a commodity consumed and along OY is
shown the marginal utility derived from them. The marginal utility of the first glass of water
is called initial utility. It is equal to 20 units. The MU of the 5th glass of water is zero. It is
called satiety point. The MU of the 6th glass of water is negative (-3). The MU curve here
lies below the OX axis. The utility curve MM/ falls left from left down to the right showing
that the marginal utility of the success units of glasses of water is falling.
 Law of Diminishing Marginal Utility

‘the additional utility which a person derive from the consumption a

commodity diminishes, that is Total Utility increase at an diminishing
rate ‘
Unit of Total Margin
Mango Utility al
Utility
1 10
2 20
MUn = TUn – TUn-
1 3 29
4 37
MU =∆TU/∆Q
5 43
6 48
7 51
8 52
9 52
10 50
 Law of Diminishing Marginal Utility

‘the additional utility which a person derive from the consumption a

commodity diminishes, that is Total Utility increase at an diminishing
rate ‘
Unit of Total Margin
Mango Utility al
Utility
1 10 10
2 20 10
3 29 9
4 37 8
5 43 6
6 48 5
7 51 3
8 52 1
9 52 0
10 50 -2
 Law of Diminishing Marginal Utility

‘the additional utility which a person derive from the consumption a

commodity diminishes, that is Total Utility increase at an diminishing
rate ‘
Unit of Total Margin
Mango Utility al
Utility
TU
1 10 10
TU
2 20 10
3 29 9
4 37 8 No of mango

5 43 6
6 48 5
7 51 3 MU

8 52 1
9 52 0
10 50 -2
No of mango
M
 Law of Diminishing Marginal Utility

Saturation Point MU =0 or TU is
maximum

TU
TU

No of mango

MU

No of mango

M
U
 Cardinal measurement of utility:- It is assumed that
utility can be measured and can be given definite
quantity like 1,2 or 3.This means that a person can
express the satisfaction derived from consumption
of commodity in quantitative term.
 Utilities are independent:-Marginal utility assumes
that utility of different commodities are
independent to each other.
 Constant Marginal utility of money:-Another
important assumption is that the marginal utility
of money remains constant.
 Introspection:-The Marginal utility also
assumes that from one’s experience ,it is
possible to draw inference about other
person.
 Rationality: The consumer aims at

maximization of utility subject to availability

of his income.
 
 The first Chapatti gives the most satisfaction,
thus the greatest utility
 The second gives less satisfaction, thus less
marginal utility (total utility is still rising
though)

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 The 6th Chapatti gives no utility.
 This is what we call the satiation point.
 At the satiation point, there is no more utility

from consuming additional units.

 Satiation point – quantity for which an

additional unit consumed provides zero
marginal utility; associated with maximum
total utility.

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 The 7th made you want to puke.
 If you continue to consume Chapatti, you will
actually feel sick, experiencing negative
utility, or disutility.

 Disutility – a negative value for marginal

utility; associated with consuming too much
of a good.

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 TOTAL AND MARGINAL UTILITY
Chappatis Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
1 10 10

0 1 2 3 4 5 6 7

Units consumed per meal

Marginal Utility (utils)

10
8
6
4
2
0
-2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
Chapatti Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
10
1 10 10

0 1 2 3 4 5 6 7

Units consumed per meal

Marginal Utility (utils)

10
8
6
4
2
0
-2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
Chapatti Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
10
1 10 10

8
2 18
0 1 2 3 4 5 6 7

Units consumed per meal

Marginal Utility (utils)

10
8
6
4
2
0
-2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
Chapatti Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
10
1 10 10

8
2 18
6
3 24 0 1 2 3 4 5 6 7

Units consumed per meal

Marginal Utility (utils)

10
8
6
4
2
0
-2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
Tacos Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
10
1 10 10

8
2 18
6
3 24 0 1 2 3 4 5 6 7

4
4 28
Units consumed per meal

Marginal Utility (utils)

10
8
6
4
2
0
-2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
Chapatti Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
10
1 10 10

8
2 18
6
3 24 0 1 2 3 4 5 6 7

4
4 28
Units consumed per meal

Marginal Utility (utils)

10
2 8
5 30 6
4
2
0
-2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
Chapatti Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
10
1 10 10

8
2 18
6
3 24 0 1 2 3 4 5 6 7

4
4 28
Units consumed per meal

Marginal Utility (utils)

10
2 8
5 30 6
0 4
6 30 2
0
-2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
TU
Tacos Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils
20
0 0
10
1 10 10

8
2 18
6
3 24 0 1 2 3 4 5 6 7

4
4 28
Units consumed per meal

Marginal Utility (utils)

10
2 8
5 30 6
0 4
6 30 2
-2 0
MU
7 28 -2
1 2 3 4 5 6 7
Units consumed per meal
 TOTAL AND MARGINAL UTILITY
TU
Tacos Total Marginal
consumed Utility, Utility, 30

Total Utility (utils)

per meal Utils Utils

0 0
20
Observe
10 Diminishing
1 10 10

8
2 18 Marginal
6
3 24
4
0 1
Utility
2 3 4 5 6 7

4 28
Units consumed per meal

Marginal Utility (utils)

10
2 8
5 30 6
0 4
6 30 2
-2 0
MU
7 28 -2
1 2 3 4 5 6 7
Units consumed per meal
 So far, we have assumed that any amount of
goods and services are always available for
consumption
 In reality, consumers face constraints (income

and prices):
◦ Limited consumers income or budget
◦ Goods can be obtained at a price
Occurs when the
consumer has
spent all income
and the marginal
utilities per dollar
spent on each
good purchased
are equal.
 Consumer’s objective: to maximize his/her
utility subject to income constraint
 2 goods (X, Y)
 Prices Px, Py are fixed
 Consumer’s income (I) is given
 Optimizing condition: MU X MU Y

PX PY

 If MU X MU Y

PX PY
 spend more on good X and less of Y
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12

How should the $10

income be allocated?
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12

Examine the two

marginal utilities
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12

Examine the two

marginal utilities
…per dollar
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12

Decision: Buy 1
Product B for $2
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth What
6 next?
6 16 8
Fifth 5 5 12 6
Sixth 4 4 6 3
Seventh 3 3 4 2
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth What
6 next?
6 16 8
Fifth 5 5 12 6
Buy one of each
Sixth 4 4 6 3
Seventh 3 3 4 2
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6 6 16 8
Fifth
and
5
then...
5 12 6
Sixth ($5 left)
4 4 6 3
Seventh 3 3 4 2
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6 6 16 8
Fifth third
5 unit
5 of
12 6
Sixth product
4 4 B 6 3
Seventh 3 3 4 2
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6
$3 left... 6 16 8
Fifth 5 5 12 6
Sixth 4 4 6 3
Seventh 3 3 4 2
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12
Second 8 8 20 10
Third 7 7 18 9
Fourth 6
$3 left... 6 16 8
Fifth 5 5 12 6
Buy
Sixth both!
4 4 6 3
Seventh 3 3 4 2
 UTILITY MAXIMIZING COMBINATION
Product A: Product B:
$ 10 income Price = $1 Price = $2
Marginal Marginal
Marginal utility per Marginal utility per
Unit of utility, dollar utility, dollar
product utils utils
(MU/price) (MU/price)

First 10 10 24 12
Second 8 8 20 10
Third 7
Income is gone... 7 18 9
Fourth
the last dollar 6spent on6 16 8
each good gave the same
Fifth 5 5 12 6
utility (8) per dollar
Sixth 4 4 6 3
Seventh 3 3 4 2
From the above , we can derive a formula for a
consumer’s equilibrium in respect of two
goods X and Y by him as under:
MUx = MUy
Px Py

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 Cardinal measurability of Utility is unrealistic
 Hypotheses of Independent Utilities wrong
 Assumption of Constant marginal utility is

wrong

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