Consumer: Consumer is a person who consumes goods and services to satisfy his needs. He consumes goods and services because there is a utility for him. Utility: The power and ability of goods and services to satisfy human wants and needs is called utility. It is the power of commodity to satisfy human wants and needs. Consumer Behavior: The manner in which consumer utilize his limited resources to attain maximum total utility. Concepts of Utility: 1. Total Utility: Total utility refers to the total satisfaction obtained from the consumption of all possible units of a commodity. 2. Initial Utility: Utility obtained from first unit of commodity is called Initial Utility. 3. Positive Utility: Increase in level of satisfaction with increase in consumption is called Positive Utility. 4. Zero Utility: When the consumption of a unit of a commodity makes no addition to the total utility, then it is the point of zero utility. 5. Negative Utility: Negative utility is when the consumption of an additional item decreases the total utility . 6. Marginal Utility: Change in total utility on consuming one extra unit of same commodity. Cardinal Approach: Quantitative measure Goods and services measured with numbers In terms of units Satisfaction through consumption of one goods at a time Law of diminishing marginal utility:
Other things remaining the same when a person takes successive units of a commodity, the marginal utility diminishes constantly". A person increases consumption of a product while keeping consumption of other products constant, there is a decline in the marginal utility that person derives from consuming each additional unit of that product. Units of commodity No. Of mangoes Total Utility (TU) Marginal Utility (MU) 1 10 10 2 18 8 3 24 6 4 28 4 5 30 2 6 30 0 7 28 -2 Example:
Assumptions: Utility is measurable Continuous consumption Homogenous units Income remain constant Quality of unit remain constant Fashion, weather, taste remain same. Small units Irrational behavior Limitations: Desire of wealth Desire of Knowledge Rare Commodities Drugs Law of Equi Marginal Utility: “The law of equi-marginal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spend on each good is equal. In other words, consumer is in equilibrium position when marginal utility of money expenditure on each goods is the same.
Schedule: Units of Money MU of Tea MU of Cigarettes 1 10 12 2 8 10 3 6 8 4 4 6 5 2 3 $5 Total Utility = 30 Total Utility = 30 A rational consumer would like to get maximum satisfaction from $5.00. He can spend money in three ways: (i) $5 may be spent on tea only. (ii) $5 may be utilized for the purchase of cigarettes only.
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