Theory of Consumer Behavior

Lesson Note For Week 1
Subject : ECONOMICS
Topic: THEORY OF CONSUMER BEHAVIOR
Class: Grade 11
Duration: One Period (40Mins)
Average Age: 13+
Sex : Mixed
Behavioral Objective: By the end of the lesson, learners should be able to:
Define the concept of Utility

Differentiate between total, average and Marginal utility.
Explain why the Utility curve slopes downward
Human wants are unlimited and they are of different intensity. The means at the disposal of a
man are not only scarce but they have alternative uses. As a result of scarcity of resources, the
consumer cannot satisfy all his wants. He has to choose as to which want is to be satisfied first
and which afterward if the resources permit. The consumer is confronted in making a choice.
For example, a man is thirsty. He goes to the market and satisfies his thirst by purchasing Coca
Cola, instead of tea. We are here to examine the economic forces which make him purchase a
particular commodity. The answer is simple. The consumer buys a commodity because it gives
him satisfaction. In technical term, a consumer purchases a commodity because it has utility for
him.
Concept of Utility
Utility is defined as: "The power of a commodity or service to satisfy human want". Utility is,
thus, the satisfaction which is derived by the consumer from consuming goods and services. It
is the basis on which the demand of an individual for a commodity depends upon.
For instance, cloth has a utility for us because we can wear it. Pen has a utility for a writer who
can write with it. The utility is subjective in nature. It differs from person to person. The utility of a
bottle of wine is zero for a person who is a nondrinker while it has a very high utility for a drinker.
Here, it may be noted that the term utility' may not be confused with pleasure or usefulness
which a commodity gives to an individual. Utility is a subjective satisfaction which a consumer
gets from consuming any good or service.
Types of utility
Utility may take any of the following forms.
1. Form utility: This is when utility is created by changing or adding to the form or shape of
goods, example, when a rubber is used to make a chair. It has created form utility.
2. Time Utility: When a seller stores millet for future and sells it when the price rises, he has
created time utility and added to the value of millet
3. Place Utility: When the chair is taken to the market for sale, it leads to place utility. This is
because it is carried from a place where it has no buyer to a place where it attracts a buyer.
4. Knowledge Utility: This is the utility created as a result of an increase in the knowledge in the
about the use of the product.
5. Service utility: This is the utility created through the use of specialized knowledge and skill to
satisfy human want through service delivery.
6. Possession Utility: This is the utility created as a result of changing the possession of a
commodity, example, a laptop in the hand of layman has little utility compared to it being with a
computer student.
7. Natural Utility: These are the utility created by all free goods such as sunshine, air, water etc.
Assumption of Cardinal Utility Analysis

1. Rationality. The consumer is rational. He seeks to maximize satisfaction from the limited
income which is at his disposal.
2. 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 which tells us a
great deal about the preference of the consumer for a good
3. 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.
4. 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.
5. Independent Utilities. According to the Cardinalist school, the utility which is derived from
the consumption of a good is a function of the quantity of that good alone. It does not
depend at all upon the quantity consumed of other goods. The goods, we can say,
possess independent utilities and are additive.
6. Introspection Method. The Cardinalist school assumes that the behavior of marginal
utility in the mind of another person can be judged with the help of self-observation. For
example, I know that as I purchase more and more of a good, the less utility I derived
from the additional units of it. By applying the same principle, I can read other people's
minds and say with confidence that marginal utility of a good diminishes as they have
more units of it.
Concept of Utility
Total Utility
Total Utility is the total satisfaction received by a consumer from the consumption of a certain
commodity or services. In other words, Total Utility is the total satisfaction received from
consuming a given total quantity of a good or service.
Marginal Utility
Marginal utility is the additional utility that a consumer gets from the consumption of extra one
units of the commodity. It is the utility derived by consuming the final units or the last units of the
commodity or services. During the process of consumption of goods and services, the utility that
a consumer derives from the first unit is greater than the second unit which means the extra unit
of consumption of units.
Average Utility
The satisfaction joined by the consumer from per unit commodity consumed is called average
utility.
It is also defined as total utility divided by units of the commodity consumed.
THE LAW OF DIMINISHING MARGINAL UTILITY

The law of diminishing marginal utility states that as more of the good is consumed, the
additional satisfaction from another bite will eventually decline. The marginal utility is the
satisfaction gained from each additional bite. As more of the good is consumed, we gain less
additional satisfaction from consuming another unit. Thus even if a good were free and you
could consume as much as you wanted, there would be a limit to the amount you would
consume due to the law of diminishing marginal utility.
Summing the marginal utilities gives us the total utility. For example, let's say the first biscuit
was an 85 and the second biscuit had a marginal utility of 79, then the total utility from
consuming two biscuit is 164. The total utility from consuming
three biscuit is 85+79+73 = 237. As long as our marginal utility is positive our total utility
increases although with diminishing marginal utility it increases at a decreasing rate.
Limitation of the Law of Diminishing Marginal

Utility
The law holds under the following conditions:
1. Homogeneous Commodity: There should be a single commodity with the same wanted by an
individual consumer. All units of the commodity must be of the same weight and quality.
2. No Change in Tastes: There should be no change in tastes and habits, customs, fashions
and income of the consumer.
3. Continuity: There should be continuity in the consumption of the commodity.
4. Suitable Size of Units: Units of the commodity
should be of a suitable size.
5. Constant Prices: Prices of the different unit and of the substitute of the commodity should
remain the same.
6. Indivisible Goods: The commodity should not be divisible.
7. Rational Consumers: The consumer should be a rational person and must not be under the
influence of something (alcohol)
8. Ordinary Goods: The goods should be an ordinary goods and not luxury.
UTILITY MAXIMIZATION
The theory of consumer behavior uses the law of diminishing marginal utility to explain how
consumers allocate their incomes. The utility maximization model is built based on the following
assumptions:
1. Consumers are assumed to be rational, trying to get the most value for their money.
2. Consumers' incomes are limited because their individual resources are limit
3. They face a budget constraint.
Consumers have clear preferences for various goods and services, thus they know their MU for
each successive units of the product.
5. Every item has a price tag. Consumers must choose among alternative goods with their
limited money incomes.
The Utility Maximization rule states that consumers decide to allocate their money incomes so
that the last naira spent on each product purchased yields the same amount of extra marginal
utility.
The algebraic statement is that consumers will allocate income in such a way that it is marginal
utility per Naira spent that is equalized.
Derivation of Demand Curve

Alfred Marshall derived the demand curve with the aid of law of diminishing marginal utility. The
Law of Diminishing Marginal Utility states that as the consumer purchases more and more units
of a commodity, he gets less and less utility from the successive units of the expenditure. At the
same time, as the consumer purchases more and more units of one commodity, then lesser and
lesser amount of money is left with him to buy other goods and services.
A rational consumer, before purchasing a
commodity compares the price of the commodity which he has to pay with the utility of a
commodity he receives from it. So long as the marginal utility of a commodity is higher than its
price (MUx > Px), the consumer would demand more and more units of it till its marginal utility is
equal to its price MUx = Px
To put it differently, as the consumer consumes more and more units of a commodity, its
marginal utility goes on diminishing. So it is only at a diminishing price at which the consumer
would like to demand more and more units of a commodity.

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Lesson Note For Week 1

Define the concept of Utility

Assumption of Cardinal Utility Analysis

THE LAW OF DIMINISHING MARGINAL UTILITY

Limitation of the Law of Diminishing Marginal

Derivation of Demand Curve

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