1. CHAPTER 2 CONSUMER BEHAVIOUR (UTILITY ANALYSIS)

2. What is UTILITY? The want satisfying power of a commodity
The capacity of a commodity to satisfy particular human want

3. UTILITY SATISFACTION Post-consumption Pre-consumption
Assumed satisfaction
Post-consumption
Something that is actually realized

4. Features
F - Forms the basis for demand E - Ethical significance not considered A - Also different from usefulness T - The measurement not possible U - Utility - subjective concept R - Relative Concept E - Even different from pleasure S - Satisfaction and utility are different U - Utility depends on intensity of the want

5. Features
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
A person will demand a commodity only if it has utility for him.
An uneducated person will not demand a book as it has no utility for him. A student will demand a book as it has utility for him.

6. Features
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
Concept of utility does not consider whether the commodity satisfies a good want or a bad want.
A gun has utility for a soldier as well as a terrorist.

7. Features Usefulness = benefit derived by consuming a commodity
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
Usefulness = benefit derived by consuming a commodity
Utility = want satisfying power of a commodity
Alcohol has utility to drunkard but it is not useful as it harms his health.

8. Features
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
Utility is a psychological concept. Therefore, cannot be measured in numbers. It cannot be said that “Good Day” biscuit has 5 utility and “Dark Fantasy” biscuit has 10 utility.

9. Features Different from person to person
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
Different from person to person
On account of differences in tastes, preference, habits, surroundings, age, occupation etc.
A measuring tape will have more utility to a tailor as compared to a cobbler.

10. Features
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
Utility of a commodity changes from time to time and place to place.
Aquaguard has more utility in the rainy season compared to other seasons because the risk of water-borne diseases is high.

11. Features
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
A commodity may have utility but not necessarily give pleasure.
A textbook has utility for a student but he may not derive pleasure from reading it.

12. Features Utility = Satisfaction = considered before consumption.
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
Utility =
considered before consumption.
want satisfying power
Satisfaction =
end result of consumption.
happiness derived after consuming a commodity.

13. Features
F - Forms the basis for demand
E - Ethical significance not considered
A - Also different from usefulness
T - The measurement not possible
U - Utility - subjective concept
R - Relative Concept
E - Even different from pleasure
S - Satisfaction and utility are different
U - Utility depends on intensity of the want
If want is intense and commodity satisfies the want, then the utility of the commodity is higher.
The utility of the fan is high when the weather is warm outside as the want for the fan’s breeze is high.

14. SMART CODE: Place Service on Time to Form Knowledge Possession
Types of Utility
Place Utility
Service Utility
Time Utility
Form Utility
Knowledge Utility
Possession Utility
SMART CODE: Place Service on Time to Form Knowledge Possession

15. When change in place of commodity increases its utility
SERVICE
TIME
FORM
KNOWLEDGE
POSSESSION
When change in place of commodity increases its utility
When goods are transferred from place of production to place of consumption.
The utility of Alphonso mangoes increases when they are transferred from mango farms to other parts of the country.

16. Professor taking lectures in a coaching class.
PLACE
SERVICE
TIME
FORM
KNOWLEDGE
POSSESSION
When any service is provided by any person to other person or group of people.
Professor taking lectures in a coaching class.

17. PLACE
SERVICE
TIME
FORM
KNOWLEDGE
POSSESSION
When utility of a commodity increases by storing it and making it available during the time of need The utility of crackers will increase if they are distributed during the period of Diwali.

18. PLACE
SERVICE
TIME
FORM
KNOWLEDGE
POSSESSION
Created by changing the form or shape of goods When wood is changed to furniture, its utility increases

19. When the user gains knowledge about the product
PLACE
SERVICE
TIME
FORM
KNOWLEDGE
POSSESSION
When the user gains knowledge about the product
Ads, demos, user manuals etc. help the user to acquire knowledge
The utility of a computer game will increase when the player knows all its control keys.

20. PLACE
SERVICE
TIME
FORM
KNOWLEDGE
POSSESSION
When the legal ownership and possession is transferred from one person to another
The cakes in the Monginis cake shop have utility. However, the utility will increase when you place your order for the cake, pay the price and take possession of it.

21. CONCEPTS OF UTILITY TOTAL UTILITY MARGINAL UTILITY
Sum total of the utilities derived by a consumer by consuming all possible units of a commodity at a point of time
TUn = MU1 + MU2 + MU3 + ………. + Mun
Direct relation between a stock of a commodity and total utility
Additional utility derived by the consumer on consumption of an additional unit of the commodity
MUn = TUn – TUn-1
Inverse relation between a stock of a commodity and marginal utility

22. Relationship : MU & TU . . . . . . . . . . . No. of choc. TU MU Y 26
1st 10
2nd 18
8 (18-10)
3rd 22
4 (22-18)
4th 24
2 (24-22)
5th
0 (24-24)
6th
-2 (22-24) Y . . 26
Point Of
Satiety 24 . . 22 . 20 18 16 14 12 . 10 . 8 6 . 4 . 2 . . X -2 1 2 3 4 5 6 -4
Dis - Utility

23. Relationship : MU & TU No. of chocolates TU MU Consumption TU MU10
2nd 18
8 (18-10)
3rd 22
4 (22-18)
4th 24
2 (24-22)
5th
0 (24-24)
6th
-2 (22-24)
Consumption TU MU
2nd to 4th
at diminishing rate
at 5th unit
Max
zero
at 6th unit
Negative

24. LAW OF DIMINISHING MARGINAL UTILITY
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25. Law of Diminishing Marginal Utility
2 fundamental principles:
The more we have the less we want of it.
Only a single want is satiable at a time.
“other things being equal, 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” – Alfred Marshall
H. GOSSES
German Economist

26. Assumptions SMART CODE: ASSUMPTON Size of the commodity is reasonable
A thirsty person will consume a glass of water and not a jar of water or water in a teaspoon
Successive consumption
There is continuity in consumption
All other factors constant
Product or Commodity is divisible
Divided into smaller parts to consume in small quantities
Uniformity of units
Identical in terms of shape, size, colour, smell etc
Measurement
Utility can be expressed in numbers
Assumptions
SMART CODE: ASSUMPTON

27. The MU remains constant Normal or Rational behaviour
If MU of money changes due to increase or decrease in income, then it cannot yield correct measurement of the MU
Only single use
If multiple utility, marginal utility will keep increasing
Normal or Rational behaviour
The aim of the consumer should be to maximize his satisfaction.
SMART CODE: ASSUMPTON

28. Exceptions

29. MONEY Drunkard HOBBIES
MU of money keeps increasing as stock of money increases as money can be used to satisfy various wants
Money does not have a single use
MU of money for a rich person reduces as his stock of money keeps increasing
Drunkard
The MU of alcohol keeps increasing as a drunkard keeps having more of it.
Drunkard cannot be considered to be rational
HOBBIES
A person having a hobby of collection of old coins, artifacts, painting, etc. gets more pleasure when he collects more of it
The person does not collect the same things hence not homogeneous

30. Repeated hearings of a song may give more satisfaction to the listener
After a certain point music becomes monotonous.
The listener may listen to another song and then again listen to the previous song. Not homogeneous.
MUSIC
BOOKS
A scholar may derive high utility from reading books as his knowledge keeps increasing
Scholar may acquire knowledge only on reading different books and not reading the same book again . Not Homogeneous.

31. MISERS
MU of money increases for a miser as the stock keeps increasing
Miser is not rational
POWER
A person who has power, keeps wanting more of it
Not rational

32. Violates assumption of
SUMMARY
Sr. No
Exception
Violates assumption of 1
Money
Single use 2
Drunkard
Rationality 3
Hobbies
Homogeneity 4
Miser 5
Books 6
Music 7
Power

33. LIMITATIONS

34. L I M I T Law of DMU is not applicable to big and costly goods
Marginal utility can be calculated only when two or more units of a commodity are consumed successively at a time
Eg: Buy only one laptop or TV or house

35. L I M I T Impractical or unrealistic assumption
Assumptions like homogeneity, rationality, constancy, successive consumption, etc

36. Measurement of utility is not possible
L I M I T
Measurement of utility is not possible
Utility is psychological concept and hence it cannot be measured cardinally.
in numeric terms

37. L I M I T Its assumption of ‘Single Use’ not practical
A person may use one commodity to satisfy many wants at a time.
For e.g. Water may be used for cooking, cleaning, bathing, drinking

38. L I M I T The marginal utility of money does not remain constant
MU of money changes:
From one person to another
For the same person from time to time.
For e.g.: The MU of money for a beggar will be more as compared to a wealthy person

39. Understand ‘Value Paradox’
Importance
Government
Provides welfare to the poor people through various welfare schemes
Higher taxes are collected from the rich people in order to finance such welfare schemes
Framing taxation policy
Law guides the Govt in framing the taxation policy wherein higher taxes are collected from the rich. MU of money is less for them and there is a less burden of taxes on them
Understand ‘Value Paradox’
Shows difference between value in use and value in exchange
Eg: ‘air’ has high value in use but no value in exchange
Monopolist
Fixes any price and even charge different price to different customers.

40. SMART CODE: Fevicol GUM Can Paste
Consumer
Consumer purchases those commodities wherein the marginal utility is equal to the price spent for it and thereby maximize his satisfaction.
For Eg: You will hesitate to pay Rs. 50 for a vada pav because you know that the MU of the one vada pav is not worth Rs.50.
Producer
Law helps the producer to fix the price of products. Larger the stock of the commodity, lower is the MU and hence the producer may decide to fix a lower price for the product.
Eg: The prices of “limited edition” items are kept very high because they producers have limited stock of that item.
SMART CODE: Fevicol GUM Can Paste

41. Law of Equi-Marginal Utility
Consumer will derive maximum satisfaction
MU derived from consuming various commodities
MU of the money income of the consumer
Respective prices of those commodities

42. Lazy Bone Support Services
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Lazy Bone Support Services
- a unit of
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