Theory of Consumer Behavior

Introduction to Consumer Behavior

• Focus on the theory of consumer behavior in economics.
• Two main concepts discussed:
  • Utility
  • Law of Diminishing Marginal Utility

Understanding Utility

• Utility: Satisfaction derived from consuming a commodity.
• Every commodity satisfies consumer wants.

Types of Utility

1. Total Utility: The total satisfaction from consuming a good.
2. Marginal Utility: The additional satisfaction from consuming one more unit of a good.
   • Example: Consuming water
     • First glass: Total utility = 20; Marginal utility = 20.
     • Second glass: Total utility = 32; Marginal utility = 12 (satisfaction decreases).
     • Third glass: Total utility = 40; Marginal utility = 8.
     • Fourth glass: Total utility = 42; Marginal utility = 2.
     • Fifth glass: Total utility = 40; Marginal utility = 0.
     • Sixth glass: Total utility = 39; Marginal utility = -1 (dissatisfaction).

Relationship Between Total Utility and Marginal Utility

• As total utility increases, marginal utility decreases at a diminishing rate.
• At the peak of total utility, marginal utility is zero.
• After the saturation point, total utility decreases and marginal utility becomes negative.

Law of Diminishing Marginal Utility

• States that satisfaction from successive units of a good diminishes as total consumption increases.

Consumer Equilibrium

• Achieved when the marginal utility of a commodity equals its price.
• For multiple commodities:
  • Marginal Utility of Commodity X / Price of Commodity X = Marginal Utility of Commodity Y / Price of Commodity Y = Marginal Utility of Commodity Z / Price of Commodity Z

Example Questions

1. As the consumption of beer increases, its marginal utility will:

   • A) Increase
   • B) Remain constant
   • C) Fluctuate
   • D) Decrease
   • Correct Answer: D) Decrease

2. Utility will mean:

   • A) Usefulness
   • B) Power of satisfying a want
   • C) Beneficial
   • D) Consumable
   • Correct Answer: B) Power of satisfying a want

3. In most cases, the marginal utility derived from a particular good:

   • A) Increases as additional units are consumed
   • B) Increases at a decreasing rate
   • C) Decreases as additional units are consumed
   • D) Remains constant
   • Correct Answer: C) Decreases as additional units are consumed

Conclusion

• Understanding the concepts of utility and marginal utility is essential in consumer behavior analysis.