Consumer behavior explained

1. THEORY OF CONSUMER BEHAVIOUR
CARDINAL APPROACH

2. CONSUMER BEHAVIOUR -
In the theory of consumer bhehavior we study the behaviour of an individual consumer. The consumer
has to decide how to spend her income on different goods.
Economists call this the problem of choice.
Most naturally, any consumer will want to get a combination of
goods that gives her maximum satisfaction. What will be this ‘best’
combination? This depends on the likes of the consumer and what
the consumer can afford to buy. The ‘likes’ of the consumer are
also called ‘preferences’. And what the consumer can afford to buy,
depends on prices of the goods and the income of the consumer.
This chapter presents two different approaches that explain
consumer behaviour
(i) Cardinal Utility Analysis and
(ii) Ordinal Utility Analysis

3. UTILITY -
A consumer usually decides his demand for a commodity on the basis of utility (or
satisfaction) that he derives from it.
What is utility?
Utility of a commodity is its want-satisfying capacity. The more the need of a commodity
or the stronger the desire to have it,the greater is the utility derived from the commodity.
Utility is subjective. Different individuals can get different levels of utility from the same
commodity. For example, some one who likes chocolates will get much higher utility from a
chocolate than some one who is not so fond of chocolates, Also, utility that one individual
gets from the commodity can change with change in place and time. For example, utility
from the use of a room heater will depend upon whether the individual is in Ladakh or
Chennai (place) or whether it is summer or winter (time).

4. CARDINAL APPROACH OF UTILITY ANALYSIS -
Cardinal Utility -
In this approach, one believes that it is measurable. One can express his or her satisfaction in cardinal numbers i.e., the
quantitative numbers such as 1, 2, 3, and so on. It tells the preference of a customer in cardinal measurement. It is measured
in utils.
Types of Utility-
It is basically of three types
1. Total Utility - The sum of the total satisfaction from the consumption of specific goods or services. It increases as more
goods are consumed.
Total Utility (T.U.) = U1 + U2 + … + Un
2. Marginal Utility - It is the additional satisfaction gained from each extra unit of consumption. It decreases with each
additional increase in the consumption of a good.
Marginal Utility (M.U.) = Change in T.U. / Change in Total Quantity = Δ TU/ Δ Q
3. Average Utility - One can obtain it by dividing the total unit of consumption by the number of total units. Suppose there
are total n units.
Average Utility (A.U.) = T.U. / Number of units = T.U. / n

5. ASSUMPTIONS -
The cardinal utility approach used in analyzing the consumer behavior depends on the
following assumptions -
1. Rationality: It is assumed that the consumers are rational, and they satisfy their wants in
the order of their preference. This means they will purchase those commodities first which
yields the highest utility and then the second highest and so on.
2. Limited Resources (Money): The consumer has limited money to spend on the purchase
of goods and services and thus this makes the consumer buy those commodities first
which is a necessity.
3. Maximize Satisfaction: Every consumer aims at maximizing his/her satisfaction for the
amount of money he/she spends on the goods and services.
4. Utility is cardinally Measurable: It is assumed that the utility is measurable, and the
utility derived from one unit of the commodity is equal to the amount of money, which a
consumer is ready to pay for it, i.e. 1 Util = 1 unit of money.

6. 5. Diminishing Marginal Utility: This means, with the increased consumption of
a commodity, the utility derived from each successive unit goes on diminishing.
This law holds true for the theory of consumer behavior.
6. Marginal Utility of Money is Constant: It is assumed that the marginal utility
of money remains constant irrespective of the level of a consumer’s income.
7. Utility is Additive: The cardinalists believe that not only the utility is
measurable but also the utility derived from the consumption of different
commodities are added up to realize the total utility.
Thus, the cardinal utility approach is used as a basis for explaining the consumer
behavior where every individual aims at maximizing his/her utility or
satisfaction for the amount of money he spends on the consumption of goods
and services.

7. What is the Law of Diminishing Marginal Utility?
The law of diminishing marginal utility states that
the amount of satisfaction provided by the
consumption of every additional unit of good
decreases as we increase that good’s consumption.
Marginal utility is the change in the utility derived
from consuming another unit of a good.
Law of Diminishing Marginal Utility states that
marginal utility from consuming each additional
unit of a commodity declines as its consumption
increases, while keeping consumption of other
commodities constant.
MU becomes zero at a level when TU remains
constant. In the example, TU does not change at
5th unit of consumption and therefore MU5 = 0.
Thereafter,
TU starts falling and MU becomes negative.

8. LAW OF DEMAND -
Law of demand states that there is an
inverse relation between the price of a
commodity and its quantity
demanded, assuming all other factors
affecting demand remain constant. It
means that when the price of a good
falls, the demand for the good rises
and when price rises, the demand
falls.
Law of demand may be explained with
the help of the following demand
schedule and demand curve :

9. REFERENCES -
WWW.INVESTOPEDIA.COM
WWW.ECONOMICDICUSSION.COM