Theory of consumer choice

Utility utility to describe the satisfaction or enjoyment or pleasureness derived from the consumption of a good or service

Marginal utility Marginal Utility is the change in total utility or satisfaction resulting from the consumption of one more unit of a good

Total Utility The total satisfaction a consumer gets from the consumption of all the units of a good consumed within a given time period.

Notions of Utility (Approaches) i) Cardinal Approach( Diminishing Marginal Utility Theory) The theory the idea that utility can be measured Assumptions o (i) Rationality. The consumer is rational. He seeks to maximize satisfaction from the
limited income which is at his disposal.

o (ii) Utility is cardinally measurable. The utility can be measured in cardinal numbers
such as 1, 3, 10, 15, etc. The utility is expressed in imaginary cardinal numbers tells us a great deal about the preference of the consumer for a good.

o iii) Marginal utility of money remains constant. Another important premise of cardinal
utility of money spent on the purchase of a good or service should remain constant.

o (iv) Diminishing marginal utility. It is also assumed that the marginal utility obtained
from the consumption of a good diminishes continuously as its consumption is increased.

(V)Rationality. It is assumed that the consumer is a rational being in the sense that he satisfies his wants in the order of their merit. It means that he consumes first a commodity, which yields the highest utility and the last which gives the least.

( Vi) Limited Money Income. The consumer has a limited money income to spend on the goods and services he consumes.

 Vii) Maximization of Satisfaction. Every rational consumer intends to maximize his satisfaction from his given money income. (viii) Utility is Additive. Cardinality maintain that utility is not only cardinally measurable but also utility derived from various goods and ser vies consumed by a consumer can be added together to obtain the total utility

Diminishing Marginal Utility theory o The hypothesis of diminishing marginal utility states that as the quantity of a good consumed increases, the marginal utility derived from that good decreases

Total utility is maximised when marginal utility = zero. Consuming the seventh pint would create dis-utility as total utility falls (marginal utility becomes negative) Example Total Utility 0 10 18 24 28 30 30 29 Marginal Utility 10 8 6 4 2 0 -1

Pints of Beer 0 1 2 3 4 5 6 7

Law of equi marginal returns o A rational consumer will spend his/her income in a way that maximizes the total utility
derived from all goods and services consumed.

Equilibrium Point o Using this theory, the consumer reaches the equilibrium, when the 1) Price of a good= Marginal Utility of a Good 2) Price Weighted marginal utility of good x = Price weighted utility of good b MUx/Px = MUy/Py =MUz/Pz==MUn/Pn Total Utility , Marginal Utility curves o Total Utility

o Marginal Utility

11) The ordinal Approach/ Theory(indifference curve Analyis)

The theory disputes that the utility can be measured Assumptions o