Consumer Behavior- Why do we study?

Consumer behavior analysis in Managerial Economics

assumes that every individual try to maximize his
satisfaction by consuming products and services with
the limited income available to him at a particular time.
In other words, it helps us to understand how consumers
set their preferences for products and services according
to their budgets.

Concept of Utility
The want satisfying power contained in a good
or service is said to be its utility. In
economics, the term utility is used to denote
the satisfaction or welfare of the consumers.
Utility derived from a good or service are of
different form i.e. form utility, place utility,
time utility and service utility.

Measurement of Utility
The concept is purely subjective i.e. there is no way of
measuring the amount of utility that a consumer might
be able to derive by consuming a particular product.
Hence it is difficult to measure but can be compared.
However, helps to how consumers make better choices.

Approaches to Measure Utility

Cardinal Utility Approach: Utility can be measured in
terms of units called as utils, which are measurable
and quantifiable. It reveals how much money a
consumer is willing to pay for a unit of product.
This approach also assumes that the utility derived from
a particular product is independent by itself.

Approaches to Measure Utility

Ordinal Utility Approach: The proponents of the
ordinal approach opine that utility cannot be
measured, but can only be ranked in order of
preference. Thus it explains that the consumer is able
to compare different level of satisfaction.
Therefore, rather than quantitative difference, it
emphasizes on qualitative difference between the two
satisfaction levels.
The approach is based on the assumption that consumer
is consistent in ranking and the preference of the
customer is based on the choice of products
available.

Assumptions of Utility Theory

Consumers are rational

Consumers always prefer more quantity
Consumers are ready to make tradeoffs
Utility is additive
The Cardinal measurement of Utility
Stability of taste
Assumption of divisibility

Concept of Total and Marginal Utility

Total Utility (Tu): In a given period of time, the
amount of utility a person derives from the
consumption of a particular products called total
utility. In the initial stage of consumption, Tu
increases, than become constant and thereafter, starts
reducing.
Marginal Utility (Mu): Additional utility obtained
by consuming an additional ( or one more) unit of a
product. Marginal utility starts diminishing as the
consumer starts consuming more unit of a product

Law of Diminishing Marginal Utility

The law states that if a consumer goes on consuming
more units of a particular product at a given point of
time, his total utility increases but only at a
diminishing rate. The law says that more a consumer
consumes a product , less is the utility he derives
from the consumption of the same product.
Usually, a consumer pays high price for the first unit
of a product, since his desire to get the product is very
high. Subsequently his utility level goes down and he
pays less for the same commodity

Exceptions to the Law of Diminishing

Marginal Utility
Rare and curious things
Drunkards
Misers
Love of display/love of power
Books/poems-music

Example of LDMU
Cups of coffee per day

Total Utility

Marginal Utility

12

12

22

10

30

36

40

41

39

-2

34

-5

Law of Equimarginal Utility

The law of equi-marginal utility explains as to how a

consumer distributes his limited income among various
commodities.
He will spend his income in such a way that last rupee spent
on each of the commodity gives him the same marginal
utility.
Therefore, this law is known as the law of eqi-marginal utility.

Limitations of the Law of Equimarginal

Utility
Consumers are not fully rational
Consumer is not calculating
Non- Availability of certain goods
Influence of fashion, customs and habits
Taste and preferences are not constant
Indivisibility of goods
Change in income and prices
Measurement of utility is difficult

How A Consumer Gets

Equilibrium Under Utility
Approach

Criticism of Utility Analysis

Consumers are not fully rational
Cardinal/ordinal measurement of utility is
difficult
Marginal utility cannot be estimated in all
conditions
Money is not a satisfactory measure of utility
Every commodity is not an independent
commodity
Man is not a calculating machine