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Consumer Behavior: Utility Analysis

The document discusses the law of diminishing marginal utility and its implications for consumer choice behavior. It notes that as consumption of a good increases, the utility from each additional unit decreases. This leads to declining marginal utility as total utility increases. The document also explains that consumers will purchase more of a good as long as the expected marginal utility exceeds the price, and they will not purchase if marginal utility is less than price. Finally, it describes the law of equi-marginal utility, which states that at the point of maximum utility, the marginal utility per rupee spent should be equal across goods.

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73 views11 pages

Consumer Behavior: Utility Analysis

The document discusses the law of diminishing marginal utility and its implications for consumer choice behavior. It notes that as consumption of a good increases, the utility from each additional unit decreases. This leads to declining marginal utility as total utility increases. The document also explains that consumers will purchase more of a good as long as the expected marginal utility exceeds the price, and they will not purchase if marginal utility is less than price. Finally, it describes the law of equi-marginal utility, which states that at the point of maximum utility, the marginal utility per rupee spent should be equal across goods.

Uploaded by

saif09876
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

Consumer Behavior Analysis

Law of Diminishing
Marginal Utility

As the quantity consumed of a


good increases, the utility from
each additional unit diminishes.
Total utility [TU] is the amount of utility an individual derives from
consuming a given quantity of a good. TU = f (Q, preferences, . . .)

Utility TU
Q TU 120

. . . . . TU

.
1 30 100

.
2 55 80
3 75

.
60
4 90 40
5 100 20
6 105
7 105 1 2 3 4 5 6 7 Q/t
8 100
3
Marginal Utility
• Marginal utility [MU] is derived from
consumption of each additional unit of a
commodity.
• As total utility increases at a decreasing rate,
MU declines.
• As total utility declines, MU is negative.
• When TU is a maximum, MU is 0.
– “Saturation point”

4
Marginal Utility [MU] is the change in total utility [ΔTU]
caused by a one unit change in quantity [ΔQ] ;
MU = ΔTU
ΔQ
The first unit consumed increases TU by 30.

..
Utility MU
The 2nd unit increases TU by 25.

..
Q TU MU 30
Q=1 TU=30

.. .
1 30 30 25
Q=1 TU=25 20
2 55 25
Q=1 10

.
TU=20
3 75 20 MU
4 90 15 1Q2 3 4 5 6 7 Q/t
5 100 10
6 105 5
7 105 0
8 100 -5

5
Individual Choice

• The individual purchases more of a


good so long as their expected MU
exceeds the price they must pay for the
good:
• Buy so long as MU > Price;
• Don’t buy if MU < Price.
• The maximum utility occurs where
MU = Price.
6
Consider an individual’s utility preference for 2 goods, X & Y;

Utility X Utility Y
Qx TUx MUx Qy TUy MUy
1 30 30 1 60 60
2 55 25 2 90 30
Once the goods have a price
3 75 20 and there is a budget 3 110 20
4 90 15 constraint, the individual 4 120 10
10 will try to maximize the
5 100 5 128 8
utility from each additional
6 105 5 Unit of money spent. 6 128 0
7 105 0 7 120 -8
8 100 -5 8 100 - 20

7
Given the budget constraint, individuals will attempt to
gain the maximum utility for each additional unit of money spent,
“the marginal rupee.”

Utility X MUX MUY Utility Y


PX PY
Qx TUx MUx Qy TUy MUy
For PX = Rs 3,
1 30 30 10. 12 1 60 60
2 55 25 8.33 6 2 90 30
3 75 20 6.67 4 3 110 20
4 90 15 5.00 For PY = Rs 5, 2 4 120 10
5 100 10 3.33 1.6 5 128 8
6 105 5 1.67 0 6 128 0
7 105 0 0 7 120 -8
8 100 -5 8 100 - 20

8
Law of Equi-Marginal Utility
• MUx = Px Utility maximization
• If MUx > Px consumer will spend more on
x
• If MUx < Px consumer will spend less on x

• With given Budget Constrain consumer


will try to distribute his income in all his
requirements in a way that his utility is
maximum from all the given products.
Constrained Optimization

if
MUX
PX
>P
MUY
Y
, BUY X !

if
MUX
PX
<MU
P Y
Y
, BUY Y !

Continue to maximize the MU


per re. spent until the budget
of Rs 25 has been spent.

10
Law of Equi-Marginal Utility

MUx/Px = MUy/Py

is an equilibrium condition
for individual choice.

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