INSTITUTE- University School of

Business
DEPARTMENT- MBA USB
MANAGERIAL ECONOMICS, 24BAT605
FACULTY NAME: Dr. Akriti Gupta

Chapter3- Consumer Behaviour DISCOVER . LEARN . EMPOWER

 COURSE OBJECTIVES

• To integrate economic theory with business practice and highlight the application of
economic theory for business decision making.

• To learn how economics analysis can be used in formulating business policies and take
rational managerial decisions.

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 Consumer www.economicsblogspot.com
Behaviour
• Space for visual (size 24)
Course Outcome

CO Title Level
Number

CO2 Apply the concept of equilibrium Apply

to both microeconomics and

macroeconomics. Will be covered in this
lecture

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 Meaning of Utility

In the words of Hibbdon , “Utility is the Quality of a good to

satisfy a want.”

Thus we can say that wants satisfying power of a commodity

is
called utility.

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Features of Utility
 UTILITY IS SUBJECTIVE: It is subjective because it deals
with the mental satisfaction of a man.

 UTILITY IS RELATIVE: Utility of a commodity never remains the

same. E.g. Cooler has utility in the summer but not during winter.

 UTILITY IS NOT ESSENTIALLY USEFUL:A commodity

having utility need not be useful. Liquor and cigarette are not useful,
but to satisfy the want of an addict then they gave utility for him.

 UTILITY IS INDEPENDENT OF MORALITY: Utility has

nothing to do with morality.

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Concepts of Utility
• Initial Utility: It is the utility a consumer receives from the first unit of a commodity
they consume. It is always positive.

• Total utility: It is the sum total of utility derived from the consumption of all units of a
commodity. Total utility is the sum of marginal utilities of all such individual items.

• Marginal Utility: it refers to the change in total utility due to the consumption of an
additional unit of a commodity.

• Marginal Utility can be (i) Positive (ii) Zero and (iii) Negative

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Laws of Utility Analysis

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 LAW OF DIMINISHING MARGINAL
UTILITY
• It states that as the consumer goes on consuming more and more amount of
commodity the marginal utility of the commodity goes on declining and
becomes zero and finally becomes negative.

• As we go on consuming more and more amount of commodity. The marginal

utility derived from it is declining becomes zero and negative.

• Eg: if you are set to buy, fountain pens at a given time, then as the number of
pens with you goes on increasing, the marginal utility from each successive pen
goes on decreasing.

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 Assumptions
• Utility can be measured in the cardinal numbers.

• Marginal utility of money remains constant.

• Marginal utility of every commodity is independent.

• Every unit of the commodity being used is of same quality and size.

• There is a continuous consumption of the commodity.

• Suitable quantity of the commodity is consumed.

• There is no change in the income of consumer, price of the commodity and its
substitutes.

• There is no change in the tastes, character, fashion and habits of consumer.

 Example
UNTIS TOTAL UTILITY MARGINAL
UTILITY
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 -2
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 TU is
Y
maximum
Saturation
TU point

0
X
Y

MU
MU +ve
MU =
0
0 X
MU
(–)ve

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Total utility is increasing at increasing rate so long as marginal utility is
positive.

Total utility becomes maximum when marginal utility is zero.

Total utility starts declining when marginal utility is negative.

TU=TOTAL UTILITY MU=MARGINAL UTILITY

TOTAL UTILITY FORMULA MARGINAL UTILITY FORMULA

TU=ΣMU MU=TU(N)-TU(N-1)

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2
 Explanation
TABLE SHOWING LAW OF DIMINISHING MARGINAL UTILITY

No. of ice cream cups Marginal Utility

First 4
Second 3
Third 2
Fourth 1
Fifth 0
Sixth -1

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 M.U.
Y
CURtf
E
It is evident from the table and A
Point of
diagram that first cup of ice cream 4 saturation
yield 4 utils thus higher

UTILITY
3+ve
satisfaction and with consumption 2 Zero
of more and more units of ice 1 M.U.
C
cream, MU from each successive X
O
unit goes on diminishing. - 1 2 3 4 5 6
-ve
1 QUANTITY
B

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 Exceptions
• Curious and Rare Things: Law does not these things. Those persons who collect
old and rare coins ,postage stamps etc derive increasing marginal utility as the
stock of these rare articles goes on increasing.

• Misers: It seems as if the law does not apply to misers, who are out to acquire
more and more of wealth. Their desire for money seems to be insatiable.

• Good Book or Poem: Reading a good book or listening to a melodious song or

beautiful poem again and again, one gets more utility than before so these also
exceptions to this law.

• Drunkards: When drunkards takes more and more pegs of liquor his desire to
have more of it goes on increasing.
MCQ

Total utility is maximum when:

A. Marginal utility is zero

B. Marginal utility is at its highest point
C. Marginal utility is equal to average
D. Average utility is maximum

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 Consumer Equilibrium
• Consumer’s equilibrium refers to a situation wherein a consumer gets
maximum satisfaction out of his limited income and he has no tendency
to make any change in his existing expenditure.

• In the words of TIBOR “A consumer is in equilibrium when he regards

his actual behavior as the best possible under the circumstances and feels
no urge to change his behavior as long as circumstances remain
unchanged”
 Assumptions
• Consumer is assumed to be rational.

• Marginal utility of Money is Constant.

• Fixed price and Income.

• Tastes are constant.

• Perfect knowledge

• Independent utility

• Cardinal Utility
 MCQ’s

1. Demand for a commodity refers to a:

A. Desire for the commodity B. Need for the commodity C. Quantity demanded of that
commodity D. Quantity of the commodity demanded at a certain price during any
particular period of time
2. Total utility is maximum when:
A. Marginal utility is zero B. Marginal utility is at its highest point C. Marginal utility is
equal to average D. Average utility is maximum
3. If regardless of changes in its price, the quantity demanded of a commodity remains
unchanged, then the demand curve for the commodity will be:
A. Horizontal B. Vertical C. Positively sloped D. Negatively sloped

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Summary

• Law of diminishing marginal utility: marginal utility will decline as the

consumer acquires additional units of a particular product
• Two explanations of the law of demand based on Income and substitution effect.

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References

• T1: Pindyck, Robert and Rubinfeld, Daniel (2017), Microeconomics, 8 th Edition, Pearson
Publication
• T2: Varian, R and Hal, J (2014), Intermediate Microeconomics, 8th Edition, East-West Press.
• T3: Dwivedi, D.N, (2015), Macroeconomics – Theory and Policy, 4th edition, Tata McGraw
Hill Publications.
• REFERENCE BOOKS
•
• R1: William J. Baumol, Alan S. Blinder, (2016), Micro Economics – Principles and policy,
13th edition, Cengage Learnings
• R2: Mankiw, Gregory N, (2014), Principles of Macroeconomics, 8th edition, Cengage
Learning.

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References

• Web Links
• https://www.youtube.com/watch?v=HHcblIxiAAk
• https://www.khanacademy.org/economics-finance-domain/ap-microeconomics/unit-2-sup
ply-and-demnd/23/v/introduction-to-price-elasticity-of-demand-ap-microeconomics-khan-
academy
• https://www.khanacademy.org/economics-finance-domain/microeconomics/elasticity-tuto
rial/price-elasticity-tutorial/v/price-elasticity-of-demand

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THANK YOU

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