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Consumers Behaviour

Consumer's Behaviour
Prof. Stanley Jevons says that utility is the capacity of a goods to satisfy human want.
Teaching Points
2.1
2.2
2.3
2.4
2.5
2.6.

Introduction
Features of Utility
Types of Utility
Concepts of Utility
Law of Diminishing Marginal Utility (Based on relationship between TU and MU)
Law of Equi-Marginal Utility

Teaching Objectives
To enable the students to understand the concept of utility and to know how utility goes
on diminishing with every successive unit of commodity consumed and about equimarginal utility.
The more you have it, the lesser is the want for it.
2.1 Introduction
In the first chapter, we. have studied that Micro Economics deals with the behaviour of
individual units of the economy.
In practice, every individual tries to satisfy his wants with available resources. It is true
that human wants are unlimited, so all human wants cannot be satisfied at a time.
However, a particular want can be satisfied fully at a specific time. Here, the study of
consumer's behaviour, i.e., utility analysis explains, the want satisfying efforts by a
consumer to maximise satisfaction.
Generally, utility means usefulness of a commodity, but in Economics, utility means
want satisfying power of a commodity.
According to Prof. Stanley Jevons, "utility is the capacity of a commodity to satisfy
human want".
2.2

Features of Utility
1.

Relative concept

2.

Subjective concept

3.

Ethically neutral

4.

Utility and usefulness are not same

5.

Not same as pleasure

6.

Utility differs from satisfaction

7.

Not easily measurable

8.

Depends upon intensity of want

9.

It is the basis of demand

1.
Relative concept - Utility is related to time and place. It differs from time to time
and place to place. e.g. Cotton clothes in summer and woollen clothes in winter have
greater utility. Similarly, woollen clothes have more utility in Kashmir than in Mumbai.
,

2.
Subjective concept - Utility of a commodity cannot be same for all individuals. It
differs from-person to person, due to differences in taste, preference, choice, liking, etc.,
of the people. e.g. Utility of a book is greater for an educated person than an illiterate
person.
3.
Ethically neutral - The concept of utility has no ethical consideration: It is morally
neutral. A commodity which possesses utility may satisfy any want. It does not make
any difference between good, bad, moral or immoral etc. e.g. Knife has utility for a
housewife to cut vegetables and for a killer to harm somebody.
4.
Utility and usefulness are not same - Utility is the want satisfying power of a
commodity, whereas usefulness is the benefit derived by a consumer. Utility expresses
level of satisfaction of a consumer and usefulness indicates value in use of a
commodity. A commodity which possesses utility may not be useful. e.g. A cigarette has
utility for a smoker, but it does not have usefulness as it is injurious to health.
5.
Not same as pleasure - Utility and pleasure are different. A commodity may have
utility, but its consumption may not provide pleasure or happiness. e.g. An injection has
utility for a patient but it is painful, so it does not give pleasure.
6.
Utility differs from satisfaction - Utility and satisfaction are inter-related terms
but there is a difference. Utility is the capacity of a commodity to satisfy human wants.
Satisfaction is the feeling of happiness realised by the consumer Utility is related to the
commodity, whereas satisfaction is experienced by a person. Utility is anticipated
satisfaction but satisfaction is the actual realisation.
Thus, utility is the starting point of consumption and satisfaction is the rend result
of consumption.
7.
Not easily measurable - Utility is a psychological concept. It is invisible and
intangible. It cannot be measured cardinally i.e., in numbers. However, one can
ordinally measure it. e.g. A thirsty person after drinking water, may derive higher or
lower level of utility.
,

8.
Depends upon the intensity of want - The utility of a commodity depends upon
the intensity or urgency of a want. The more urgent is the want, the greater is the utility

and vice versa. As the urgency of want declines, utility diminishes. e.g. Utility of food is
higher for a hungry person and utility declines with the satisfaction of hunger.
9.
It is the basis of demand - Utility forms the basis of demand. If a commodity
does not give any utility, a person may not demand it. He will demand a commodity only,
if it gives him utility. e.g. Demand for pen is more from students because utility of pen is
more for them.
2.3

Types of utility
1.
Form utility
2.
Place utility
3.
Time utility
4.
Service utility
5.
Knowledge utility
6.
Possession utility
Various types or forms of utility are as follows

1.
Form utility - When utility increases due to the change in the shape or structure
of existing material, it is called farm utility.
Toys made out of clay, making furniture from wood, a dress from fabric, etc., are
some examples of form utility.
2.
Place utility - When utility of a commodity increases due to the change in the
place of utilisation, it is also created with the transfer of goods from the place of
production to the place where they are consumed. e.g. Sea sand has more utility in
construction work than along the sea shore.
3.
Time utility _When utility of a commodity increases with a change ; in the time of
utilisation, it is called time utility. e.g. Umbrellas have greater utility during rainy season
than in winter.
Time utility also refers to storing of goods and using at the time of need or scarcity.
4.
Service utility - It arises when personal services are rendered by various
professionals in the society to others. Services provided by doctors to patients,
knowledge given by teachers to students, suggestions by lawyers to his clients, etc.,
are examples of service utility. In this case, production and consumption both. fake
place at the same time.
5.
Knowledge utility - It increases when a consumer acquires knowledge about a
particular product. e.g. Utility of. a mobile phone or computer increases when a person
knows about its various functions.
6.
Possession utility - It arises when the ownership of goods is transferred from
one person to another. e.g. Possession utility is enjoyed by the consumers when they
purchase goods from sellers.
2.4

Concepts of utility

There are two main concepts of utility, as follows:1.


Total utility
2.
Marginal utility
1.
Total utility refers to the sum of utilities derived by the consumer from all
units of a commodity consumed. It is an aggregate of utilities from all successive units
of a commodity.
TU = SMU or TUn = MU + MU + MU .... MUn
1

TU = Total Utility. MU = Marginal Utility.


2.
Marginal utility refers to the additional, utility derived by a consumer from
additional unit of a commodity consumed. It is the utility from the last unit of a
comniodity. In short, MU is the addition made by last unit to TU.
Relationship between total utility and marginal utility can be explained with the help
of the following schedule and diagram:Total Utility and Marginal Utility Schedule
Table No. 2.1
Unit of Commodity TU Unit MU Unit
1

14

18

20

20

18

-2

The above given schedule indicates MU and TU derived from each unit of a
commodity.
Graphical representation of TU and MU

Fig. No. 2.1


The above given schedule land diagram explain that:1.

Initially, total utility and marginal utility are equal. (TU=MU)

2.
From the consumption of second unit, total utility increases at a diminishing rate
and marginal utility goes on decreasing. So TU curve slopes upward and MU curve
slopes downward. (TUT, MUJ.)
3.
When total utility is maximum; marginal utility is zero. It indicates point' of satiety
(i.e. maximum satisfaction). At this point, TU curve reaches the highest level and MU
curve touches the x-axis. (TU maximum, MU zero)
4.
When total utility declines, marginal utility intersects the `X' axis and becomes
negative. It shows dissatisfaction of a consumer. In this case, TU curve starts falling and
MU curve enters into the negative quadrant. (TUJ, MU negative)
It is observed that total utility is always positive but marginal utility may be positive,
zero or even negative.
2.5

The Law of Diminishing Marginal Utility


Introduction

The law explains economic behaviour of a rational consumer. It is a common


experience that the more we have of a commodity, less we desire to have more of it.
This fact is expressed by the law of Diminishing Marginal Utility (DMU). It was first
proposed by Mr. Gossen. So this law is known as Gossen's first law. However it was
further explained in detail by Prof. Alfred Marshallin his book 'Principles of Economics'
published in 1890.
Statement of the law
According to Prof. Alfred Marshall, other thing being constant, 'the additional benefit
which a person derives from the increase in the stock of a thing diminishes with every
increase in the stock that he already has.'
-

In simple. words, the law explains that marginal utility goes on diminishing with an
increase in the successive unit of a commodity consumed.,
It can be graphically represented with the help of the following schedule and diagram:-

Marginal Utility Schedule


Table No. 2.2
Unit of Commodity MU
1

-2

Marginal Utility Curve


Fig No. 2.2
Explanation of the diagram:
In the above given diagram, 'X' axis indicates units of a commodity and `Y' axis
measures MU. Various points of MU are plotted on the graph as per the given schedule.
We get NW curve by joining these points.
MU curve slopes downward from left to right. It shows that MU goes on diminishing with
every successive increase in the consumption of a commodity.
In this case, when a consumer consumes the fifth unit, MU becomes zero. So MU curve
touches 'X' axis. It indicates full satisfaction level. It is called the point of satiety.
Beyond the point of satiety, further consumption of a commodity brings disutility. It is
shown by negative marginal utility.
Thus, it explains that, MU diminishes with every increase in consumption of commodity.
Assumptions of the law
The validity of the law depends upon the following assumptions
1.

Homogeneity

2.

Single use

3.

Cardinal measurement

4.

Rationality

5.

Continuity

6.

Reasonability

7.

Constancy

8.

Divisibility

9.

Constant marginal utility of money income

1.
Homogeneity - The law assumes that units of a commodity consumed by a
consumer are uniform. They are identical or same in case of size, colour, shape, taste,
quality, etc.
2.
Single use - Utility is multi-purpose for some goods which satisfy variety
wants. Here, it is assumed that a commodity is used to satisfy only a single want
experience the law.
3.
Cardinal measurement - Utility can be measured in numbers. So that, it
possible to know and compare utility derived from each unit of a commodity. It helps
understand the law.

of
to
is
to

4.
Rationality - A consumer is assumed to be a rational person and his behaviour is
normal and therefore, he tries to maximise his satisfaction.
5.
Continuity - The units of a commodity are consumed in quick succession, one
after another. MU will not diminish, if there is time interval.
6.
Reasonability - The units of commodity consumed, should be of a standard or
normal size. They should neither be too big nor too small. e.g. a cup of tea, a glass of
water, etc.
7.
Constancy - Income, taste, habits, liking, etc., of a consumer and price of a
commodity remain constant throughout the period of consumption. It also assumes that
MU of each unit of money remains constant.
8.
Condition of divisibility - The law assumes that the commodity consumed by
the consumer is divisible so that it can be accquired in small quantities for quick
consumption.
9.
Constant marginal utility of money income When the consumer spends his
income, the utility of the remaining money income is the same as his total income.
The law holds true only, if the above given assumptions are fulfilled.
Exceptions of the law
Certain cases are considered as an exceptions to the law, for which the law is not
applicable. They are as follows:1.
2.
3.
4.
5.
6.
7.

Hobbies
Misers
Drunkards
Music
Power
Reading
Money

1.
Hobbies - In certain hobbies like collection of stamps, rare coins, precious
paintings, etc., the law is not applicable because every additional increase in stock
gives more pleasure, which increases MU. But it violates homogeneity condition.
2.
Misers - In case of miser, every additional rupee gives him more and more
satisfaction, because he is a irrational person. So his MU tends to increase with an
increase in the stock of money. However, it ignores rationality assumption.
3.
Drunkards - It is said that, in case of drunkards, the level of intoxication
increases with every additional unit of liquor consumed. So MU received by drunkards
may increase. This condition is similar to all addicts. But here, rationality condition is
violated.
4.
Music - Some people are fond of music. It is experienced that, a repeated of
hearing of music, gives more and more satisfaction. It increases MU of music. So the
law is not applicable. However, it does not fulfil the assumptions like homogeneity and
continuity.
5.
Power - It is an exception to the law because when a person acquires power, his
lust for power increases. He would want to have more and more of it. However, it
violates rationality assumption.

6.
Reading - Since, more reading gives deeper knowledge, a scholar may receive
more and more satisfaction, when he reads various books again and again, and
therefore Marginal Utility tends to increase. But, here homogeneity and continuity
condition's are not satisfied.
7.
Money - It is observed that MU of money never becomes zero. It increases when
the stock of money increases. It is because money is a medium of exchange is used to
purchase various goods and services to satisfy various wants. Therefore the law is not
applicable in case of money. According to some economists however the law is
applicable to money.
All these cases are said to be exceptions of the law. But they are not real
exceptions as they violate some of the assumptions. So the law of DMU has universal
applicability.
Limitations (criticisms) of the law
1.

Unrealistic assumptions

2.

Cardinal Measurement

3.

Indivisible goods

4.

Constant marginal utility of money

5.

A single want

1.
Unrealistic assumptions The law of Diminishing Marginal Utility is based upon
various assumptions like homogeneity, continuity, constancy, rationality, etc. But in
reality, it is difficult to fulfil all these conditions at a time.
2.
Cardinal measurement - The law assumes that utility can be expressed
cardinally, i.e., in numbers, so it can be added, compared and presented through
schedule. In fact, cardinal measurement of utility is not possible-because it is a
psychological concept., but it can be measured ordinally in form, of degree of
comparison, i.e., higher or lower level of satisfaction.
3.
Indivisible goods - The law is not applicable to bulky or indivisible goods like T.V,
car, house, etc. It is because, normally they are not purchased more than one at a time.
So it is impossible to compare the marginal utility derived from various units of such
commodities.
4.
Constant marginal utility of money - The law assumes that marginal utility of
each unit of money remains constant, however, critics argue that marginal utility of
money differs from person to person. It is influenced by changes in prices, stock of
money, etc.
5.
A single want - The law is restricted to the satisfaction of a single want only.
However, in practice, a man satisfies many wants at a time.
Importance or Significance of the law:-

1.
2.
3.
4.
5.
6.

To the consumer
To the producer
To the monopolist
To the government
To the finance minister
To understand paradox of value

1.
To the consumer - The law of diminishing marginal utility guides the consumer in
planning their budget, so as to achieve maximum satisfaction from the resources
available.
2.
To the producer - The law is important to the producer in determining price and
sales policy. It helps to maximise his profits.
3.
To the monopolist - The law of DMU is helpful to the monopolist to practice price
discrimination, i.e., charging different prices to different consumers for the same
product.
4.
To the government - The law of diminishing marginal utility is useful to the
government to implement various economic policies like public distribution system,
social justice, etc. It helps to improve the welfare of the people in the society.
5.
To the finance minister - The law of diminishing marginal utility guides the
finance minister to frame progressive taxation policy. It helps to reduce economic
inequality. The law is also useful to economic experts, bankers and modern economists.
6.
To understand paradox of value - The law explains 'value paradox' by showing
the difference between value in use and value in exchange. Value-in-use refers to
usefulness of a commodity. Whereas value-in-exchange means rate. of exchange of
one commodity in terms of another.
Some commodities have high value-in-use but low exchange value, for example
water. Whereas some commodities have low value in use but high exchange value due
to its scarcity. For example diamonds. Higher TU determines greater value in use and
higher MU denotes greater value in exchange of a commodity.
.

2.6.

Law of Equi-marginal Utility


Introduction

The law of equi-marginal utility is an extension of the law of diminishing marginal utility.
It explains consumer equilibrium, when he spends his income on various goods to
maximise satisfaction.
The law of equi-marginal utility is also known as the law of maximum satisfaction.
The law of equi-marginal utility is based, upon following assumptions:
1.
2.

Utility can be measured cardinally.


Consumer's behaviour is rational and he aims at maximum satisfaction.

Equi Marginal Utility Schedule

3.
4.
5.
6.
7.
8.

Income of a consumer is fixed.


A consumer spends his entire income on commodities - A, B & C respectively.
All units of each commodity are homogeneous.
Prices of commodities are constant.
MU of money is, constant.
A consumer knows marginal utility schedule and prices of commodities - A, B & C.

Statement of law
According to Prof. Alfred Marshall, other things being equal, a consumer will distribute
his money income on different goods in such a way that the ratio of marginal utilities
and their prices tends'to be equal.
.

In other words, a consumer gets maximum total utility from spending his income, when
the marginal utility derived from the last unit of money, spent on each commodity tends
to be equal.
If a consumer spends his given income on three goods, consumers equilibrium
can be presented as follows:
Where, MUA, MUB and MUG refer to marginal utility derived from commodities
A, B and C, respectively. MUm =marginal utility of money spent.
It can be explained with the help of the above schedule :
The above given schedule indicates marginal utility derived from commodities A, B, and
C. The price of commodity A = Rs. 2/-, commodity B = Rs. 3/- and commodity C = Rs.
4/-.
Let us suppose that, an individual has limited income of Rs. 25/-. A consumer will
equate MU of money spent on various commodities with price.
In this case, rational consumers will purchase-4 units of commodity A
+ 3 units of commodity B
+ 2 units . of commodity C

So he will spendCommodity Units Price Amount Spent (Unit X Price)


A

Rs. 8

Rs. 9

Rs. 8

Total

Rs. 25

According to the law, consumer is in equilibrium when


TU derived = TUA 24 + 20+ 16 + 12 = 72
TUB 30 + 24 + 18 = 72 units
TUC 32 + 24 = 56 units
Total utility 200 units
Thus, a consumer obtains maximum TU from various commodities with limited income
of Rs. 25/- No other combination of commodities A, B and C can give him more than 200
units of TU. Hence, the law of equi-marginal utility guides the consumer to get maximum
satisfaction from the given income, while arranging his total expenditure. Therefore, the
law has great practical significance.