Muzahir Abbas Syed
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Theory of Consumer Behaviour
Consumer equilibrium is a situation in which the consumer’s satisfaction is maximum
and they have no desire or urge to change their consumption of a good or a service
given the prices of goods and services.
Theory of Consumer Behavior
Cardinal Approach Ordinal Approach
Law of Diminishing Marginal Utility Budget Line
Law of Equi Marginal Utility Indifference curve Analysis
Cardinal Approach
Assumptions:
1. Utility can be measured in cardinal or whole numbers.
2. Utility from different goods can be added.
3. Consumer tastes remain the same.
4. Mu of money remains constant.
5. Consumers are rational.
Basic Concepts:
Utility: Satisfaction gained from the consumption of a good or a service. Utility is
subjective in nature which means it differs from person to person.
Total Utility: Aggregate or Total Satisfaction achieved from the consumption of a
given amount of goods and services.
TU=MU1+MU2
Marginal Utility: Satisfaction gained from the consumption of an additional unit of
good or service.
∆𝑇𝑈
MU= ∆𝑄
1
, Muzahir Abbas Syed
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Law of Diminishing Marginal Utility
“According to this law, with the continuous use of any commodity, the marginal utility
(MU) derived from each successive unit goes on to fall and total utility (TU) goes on
to increase at a decreasing rate.”
Assumptions:
1. There should be a continuous use of the commodity.
2. Consumer tastes should not change.
3. The income of the consumers should remain the same.
4. Quality of successive goods should remain the same.
Hypothetical Example:
Assume that a consumer consumes 6 apples on after another. The 1st apple gives
him 20 utils (units of utility). When he consumes the 2nd and 3rd apple, the MU of
each additional apple will be lesser. This is because an increase in consumption of
apples, his desire for more apples fall. This example proves that with every
successive units of a commodity, the consumer gets utility at a diminishing rate.
Units MU TU
1 20 20
2 15 35
3 10 45
4 5 50
5 0 50
6 -5 45
This can be explained with a diagram.
2
, Muzahir Abbas Syed
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Relationship between MU & TU:
• When MU is positive, TU increases.
• When MU is zero, TU is maximum.
• When MU is negative, TU falls.
Consumer Equilibrium through LDMU
P=MU Criteria
According to Cardinal Theorists, rational consumers will take their MU into account
before making any purchase. So as long as
• MU ≥ P, he will buy more of a commodity,
• MU < P, he will not buy the product.
• MU = P, consumer will be in equilibrium.
In short, a rational consumer will consume the product until and unless his MU=P.
The diagram shows a rational consumer will spend his income or money on a good or
a service until and unless the Marginal utility that he derives from a good becomes
equal to the price he’s paying for a good. If a consumer is deriving more utility from a
good as compared to its price, then they will keep on consuming the good until both
price and MU become equal.
3
, Muzahir Abbas Syed
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Derivation of the Demand curve and LDMU
(Why is the demand curve negatively sloped?)
One important reason for the demand curve to be negatively sloped is the LDMU. As
the consumer goes on to consume a commodity, his MU falls and as a result, he is
willing to pay less for each additional unit.
In Fig.A, the MUx is negatively sloped. It shows that as the consumer acquires larger
quantities of good X, his MU diminishes. Consequently, at diminishing price, the Qd
of good X diminishes as shown in Fig.B. AT X1, MU of the good is MU1 which
equals to P1. The consumer here demands OX1 quantity at price OP1. In the same
way, X2 is equal to P2. At price P2, consumer will demand OX2 quantity and so on.
Exceptions of LDMU:
• In case of desire for money.
• In case of knowledge.
• In case of desire for unique objects.
Limitations of LDMU:
• LDMU is a single good model but consumers use many good.
• Consumer tastes keep on changing and does not remain constant.
• Utility can’t be measured in cardinals or whole numbers.
Law of Equi Marginal Utility
To explain the theory of consumer behavior among a number of commodities, LDMU
is not sufficient. Therefore, cardinal theorists make use of the law of Equi marginal
utility.
It states that,
4
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Theory of Consumer Behaviour
Consumer equilibrium is a situation in which the consumer’s satisfaction is maximum
and they have no desire or urge to change their consumption of a good or a service
given the prices of goods and services.
Theory of Consumer Behavior
Cardinal Approach Ordinal Approach
Law of Diminishing Marginal Utility Budget Line
Law of Equi Marginal Utility Indifference curve Analysis
Cardinal Approach
Assumptions:
1. Utility can be measured in cardinal or whole numbers.
2. Utility from different goods can be added.
3. Consumer tastes remain the same.
4. Mu of money remains constant.
5. Consumers are rational.
Basic Concepts:
Utility: Satisfaction gained from the consumption of a good or a service. Utility is
subjective in nature which means it differs from person to person.
Total Utility: Aggregate or Total Satisfaction achieved from the consumption of a
given amount of goods and services.
TU=MU1+MU2
Marginal Utility: Satisfaction gained from the consumption of an additional unit of
good or service.
∆𝑇𝑈
MU= ∆𝑄
1
, Muzahir Abbas Syed
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Law of Diminishing Marginal Utility
“According to this law, with the continuous use of any commodity, the marginal utility
(MU) derived from each successive unit goes on to fall and total utility (TU) goes on
to increase at a decreasing rate.”
Assumptions:
1. There should be a continuous use of the commodity.
2. Consumer tastes should not change.
3. The income of the consumers should remain the same.
4. Quality of successive goods should remain the same.
Hypothetical Example:
Assume that a consumer consumes 6 apples on after another. The 1st apple gives
him 20 utils (units of utility). When he consumes the 2nd and 3rd apple, the MU of
each additional apple will be lesser. This is because an increase in consumption of
apples, his desire for more apples fall. This example proves that with every
successive units of a commodity, the consumer gets utility at a diminishing rate.
Units MU TU
1 20 20
2 15 35
3 10 45
4 5 50
5 0 50
6 -5 45
This can be explained with a diagram.
2
, Muzahir Abbas Syed
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Relationship between MU & TU:
• When MU is positive, TU increases.
• When MU is zero, TU is maximum.
• When MU is negative, TU falls.
Consumer Equilibrium through LDMU
P=MU Criteria
According to Cardinal Theorists, rational consumers will take their MU into account
before making any purchase. So as long as
• MU ≥ P, he will buy more of a commodity,
• MU < P, he will not buy the product.
• MU = P, consumer will be in equilibrium.
In short, a rational consumer will consume the product until and unless his MU=P.
The diagram shows a rational consumer will spend his income or money on a good or
a service until and unless the Marginal utility that he derives from a good becomes
equal to the price he’s paying for a good. If a consumer is deriving more utility from a
good as compared to its price, then they will keep on consuming the good until both
price and MU become equal.
3
, Muzahir Abbas Syed
BDC,BLL,SICAS,ROOTS,ISL (PA, RR)
Derivation of the Demand curve and LDMU
(Why is the demand curve negatively sloped?)
One important reason for the demand curve to be negatively sloped is the LDMU. As
the consumer goes on to consume a commodity, his MU falls and as a result, he is
willing to pay less for each additional unit.
In Fig.A, the MUx is negatively sloped. It shows that as the consumer acquires larger
quantities of good X, his MU diminishes. Consequently, at diminishing price, the Qd
of good X diminishes as shown in Fig.B. AT X1, MU of the good is MU1 which
equals to P1. The consumer here demands OX1 quantity at price OP1. In the same
way, X2 is equal to P2. At price P2, consumer will demand OX2 quantity and so on.
Exceptions of LDMU:
• In case of desire for money.
• In case of knowledge.
• In case of desire for unique objects.
Limitations of LDMU:
• LDMU is a single good model but consumers use many good.
• Consumer tastes keep on changing and does not remain constant.
• Utility can’t be measured in cardinals or whole numbers.
Law of Equi Marginal Utility
To explain the theory of consumer behavior among a number of commodities, LDMU
is not sufficient. Therefore, cardinal theorists make use of the law of Equi marginal
utility.
It states that,
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