Consumer Behaviour

1. Utility Theory
Dr. Laila Memdani

2. DEFINITION OF CONSUMER
BEHAVIOUR
Consumer behaviour refers to
the study of consumer while
engaged in the process of
consumption.

3. UTILITY APPROACH
 Definition
– ‘Utility’ means the satisfaction obtained from consuming a
commodity.
 Two Types of Approach
– Cardinal Approach
• The cardinal utility theory says that utility is measurable and by
placing a number of alternatives so that the utility can be added.
• The index used to measure utility is called utils.
– Ordinal Approach
• The ordinal utility theory says that utility is not measurable but it
can be compared.
• Ordinal approach uses the ranking of alternatives as first, second,
third and so on.

4. TOTAL UTILITY AND MARGINAL
UTILITY
TOTAL UTILITY (TU)
The total satisfaction that a person gets from the
consumption of goods and service.
TOTAL UTILITY (TU)
The total satisfaction that a person gets from the
consumption of goods and service.
MARGINAL UTILITY (MU)
The additional to total utility as a result of consuming one more units
of the same good or services.
Marginal Utility (MU) = Change in Total Utility
Change in Total Quantity
MU = ∆ TU/ ∆ Q
MARGINAL UTILITY (MU)
The additional to total utility as a result of consuming one more units
of the same good or services.
Marginal Utility (MU) = Change in Total Utility
Change in Total Quantity
MU = ∆ TU/ ∆ Q

5. LAW OF DIMINISHING
MARGINAL UTILITY
 Definition
The additional benefit which a person derives from a
given increase of a stock of a thing diminishes, other
things being equal, with every increase in the stock that
he already has.
OR
Law of Diminishing Marginal Utility states that as
consumption increases more and more, marginal utility
will be less and less.

6. LAW OF DIMINISHING MARGINAL
UTILITY (cont.)
Units of
Apples
Total Utility Marginal Utility
1 20 20
2 35 15
3 45 10
4 50 5
5 50 0
6 45 -5
7 35 -10
8 20 -15
TU increases from consumption of 1st
unit of apple until the 5th
unit of apples. After the 5th
unit of apples, TU will decrease.
TU increases from consumption of 1st
unit of apple until the 5th
unit of apples. After the 5th
unit of apples, TU will decrease.
MU will decrease
and become zero at
the 5th
unit of apples
and further
consumption of
apples will not
satisfy the consumer
as the MU shows
negative signs.
MU will decrease
and become zero at
the 5th
unit of apples
and further
consumption of
apples will not
satisfy the consumer
as the MU shows
negative signs.

7. LAW OF DIMINISHING
MARGINAL UTILITY (cont.)
When TU is increasing, MU will be positive.
When TU is at its maximum, MU will be zero.
When TU is decreasing, MU will be negative.
When TU is increasing, MU will be positive.
When TU is at its maximum, MU will be zero.
When TU is decreasing, MU will be negative.

8. LAW OF EQUI-MARGINAL
UTILITY (EMU)
 Definition
The Law of Equi-Marginal Utility (EMU) states that
other things being equal, a consumer gets maximum
satisfaction when he allocates his limited income to the
purchase of different goods, where the marginal utility
derived from the last unit of money spent on each item
of expenditure tends to be equal.
– This is also known as conditions for maximum utility
or satisfaction.

9. LAW OF EQUI-MARGINAL UTILITY
(EMU) (cont.)
 Conditions for Equilibrium
For consumer equilibrium, this condition must be fulfilled.
Condition 1: Every Ruppee spent on every commodity must
yield the same marginal utility.
Marginal Utility of X = Marginal Utility of Y
Price of X Price of Y
Condition 2: Total expenditure of all goods must be equal to
the total budget allocated to maximize utility.
P1Q1 + P2Q2 + … + PnQn = Total budget

10. LAW OF EQUI-MARGINAL
UTILITY (EMU) (cont.)
EXAMPLE: Arwin has an income of Rs.37 and the prices of goods P, Q and R are Rs.5, Rs.1 and Rs.4 respectively.EXAMPLE: Arwin has an income of Rs.37 and the prices of goods P, Q and R are Rs.5, Rs.1 and Rs.4 respectively.
Condition 1 : Every Ruppee spent on every
commodity must yield the same marginal utility.
Condition 1 : Every Ruppee spent on every
commodity must yield the same marginal utility.
Fulfilling condition 1, two combination of goods are obtained:
Combination 1 : 2P, 4Q and 1R
Combination 2 : 4P, 5Q and 3R
Condition 2 : Total
expenditure of all goods must
be equal to the total budget
allocated to maximize utility.
Condition 2 : Total
expenditure of all goods must
be equal to the total budget
allocated to maximize utility.
Combination 1 : 2P, 4Q and 1R
2(5) + 4(1) + 1(4) = 18
Combination 2 : 4P, 5Q and 3R
4(5) + 5(1) + 3(4) = 37
So, 4 units of Product P, 5 units of Product Q and 3 units of Product R will be purchased by
Arwin.