The Theory of Consumer Behavior

1. The Theory
of
Consumer
Behavior

2. THE UTILITY FUNCTION
– Consumer Theory describe how consumers
make decisions on what to buy.
– Consumption refers to the use of goods and
services to satisfy human wants directly.

3. Utility is the term used for satisfaction.
Utility is something intangible. As such,it is not easy to
measure.
– Quantifiable goods are subject to measurement; they can be
expressed in numerical values. In order to make it easy to
understand the concept of utility, we shall assume that it is
measurable in units, which we shall call utils. A util is one unit of
satisfaction.
– Important measures of utility are: Total Utility and Marginal Utility
refers to the combined utility derived from consuming certain
units of a good. Marginal Utility derived from consuming certain
units of a good. Marginal Utility refers to the additional utility
derived from consuming an additional unit of the good.

4. Let us study the following utility schedule of consumer
– Table Hypothetical Utility Schedule for Chocolate Candy
Quantity of Consumption Total Utility Marginal Utility
1 8 8
2 15 7
3 21 6
4 26 5
5 30 4
6 33 3
7 35 2
8 36 1
9 36 0
10 35 -1

5. – When he eats the first bar, he gets a utility of 8. The second bar gives
him a utility of only 7. We see that while his total utility increases
with each additional chocolate from each additional unit starts to
diminish. Notice that upon eating his ninth bar, his total utility does
not change at all, which means that there is no additional utility
derived from the ninth unit. That’s why marginal utility at 9 units of
consumption is equal to zero. Look at what happens as he consumes
the tenth bar. Instead of Increasing, the total utility declines and
marginal utility is even negative. Are there physical manifestation of a
negative marginal utility? Physical discomforts such as an upset
stomach, dizziness, and indigestion are sign that instead of adding to
one’s utility, the consumption of the additional unit of the good has
resulted in the decrease of total utility derived.

6. – Law of Diminishing Marginal Utility
– The law states that as additional units of a good
are consumed, the additional utility derived from
each additional units tends to diminish. The
reason for this behaviour is the satiation of
human wants. Man’s wants can be fully satiated
at a given time. That is why owner of vikings,
Dad’s or buffet 101 do not lose money even if
people are free to eat all they can. At some point,
they will simply give up eating because their
wants have been satisfied.