 Consumer behavior and demand

 Satisfaction,  happiness,  benefit

Cardinal Utility: Assigning numerical values to the amount of satisfaction Ordinal Utility: Not assigning numerical values to the amount of satisfaction but indicating the order of preferences, that is, what is preferred to what

x1x1 x2x2 U 0 2 U

The amount of satisfaction obtained by consuming specified amounts of a product per period of time. 5 units of the product per period of time yields 55 utils of satisfaction

The change in total utility (  TU) resulting from a one unit change in consumption (  X). MU =  TU/  X

QTUMU Example (Table 4.1):  TU, in general, increases with Q  At some point, TU can start falling with Q  If TU is increasing, MU > 0  From Q = 1 onwards, MU is declining  principle of diminishing marginal utility  As more and more of a good are consumed, the process of consumption will (at some point) yield smaller and smaller additions to utility QTUMU Example (Table 4.1):

Quantity Total utility(in utils) Q TU Figure 4.1

Quantity Marginal utility (in utils) Q MU Figure 4.2

Each additional unit of a product contributes less extra utility than the previous unit. MU = dTU/dX

 Example If I’m really hungry, I get a lot of satisfaction from first slice of pizza. If I keep eating pizza, the satisfaction from the 8th slice would be much less than that of the first slice.

Explanation: As more and more quantity of a commodity is consumed, the intensity if desire decreases and also the utility derived from the additional unit. Assumptions: AAll the units of a commodity must be same in all respects TThe unit of the good must be standard TThere should be no change in taste during the process of consumption TThere must be continuity in consumption TThere should be no change in the price of the substitute goods

Notes about the Law of Diminishing MU  Time period must be specified for law.  Law tells us that eventually the marginal utility curve will be downward sloping.  Law tells us that eventually the total utility curve will become “flatter.”

MU Q

 Eventually downward sloping Law of diminishing marginal utility  Positive always Rational behavior  Consumer only purchases a good if they get some positive utility from it.

TU Q  TU QQ QQ

 Positive slope Consumer only purchases a good if gets some positive amount of utility (rational behavior)  Slope gets flatter as Q increases  Law of diminishing marginal utility

QTUMU Example (Table 4.1):  TU, in general, increases with Q  At some point, TU can start falling with Q  If TU is increasing, MU > 0  From Q = 1 onwards, MU is declining  principle of diminishing marginal utility  As more and more of a good are consumed, the process of consumption will (at some point) yield smaller and smaller additions to utility QTUMU Example (Table 4.1):

X X Total Utilit y Margin al Utility TU MU X1X2X1X2 X1X2X1X2 Graphs of Total Utility & Marginal Utility X 2 is where total utility reaches its maximum. MU is zero. This is the saturation point or satiation point. After that point, TU falls and MU is negative. X 1 is where marginal utility reaches its maximum. This is where we encounter diminishing marginal utility. The slope of TU has reached its maximum; TU has an inflection point here.

This law states that the consumer maximizing his total utility will allocate his income among various commodities in such a way that his marginal utility of the last rupee spent on each commodity is equal. Or The consumer will spend his money income on different goods in such a way that marginal utility of each good is proportional to its price

# # It is difficult for the consumer to know the marginal utilities from different commodities because utility cannot be measured. #Consumer are ignorant and therefore are not in a position to arrive at an equilibrium. #It does not apply to indivisible and inexpensive commodity.