Principles of

Micro Economics
Module No. 007
Theory of Consumer Behavior
Cardinal Utility Approach

By Muhammad
Shahid Iqbal
 The Theory of Consumer Behavior
This theory is concerned with the questions
How does a consumer deicide how much a
commodity to buy at a given price
How does the consumer respond to change in
price of the commodity, given his income and
other prices
The principle assumption is: a consumer attempts to
allocate his limited money income among available
goods and services so as to maximize his utility.
The neo-classical economist developed the theory of
consumption based on the assumption that utility is
measurable and can be expressed cardinally.
“Utils” meaning the units of utility. Here, one Util is
equivalent to one rupee and the utility of money
remains constant.
 The Cardinal Approach
Utility: The value a consumer places on a unit of
a good or service depends on the pleasure or
satisfaction he or she expects to derive form
having or consuming it at the point of making a
consumption (consumer) choice.
In economics the satisfaction or pleasure
consumers derive from the consumption of
consumer goods is called “utility”.
Consumers, however, cannot have every thing
they wish to have. Consumers’ choices are
constrained by their incomes.
Within the limits of their incomes, consumers
make their consumption choices by evaluating and
comparing consumer goods with regard to their
“utilities.”
Total Utility & Marginal Utility
Total Utility: The total benefit that a person gets from
the consumption of all the different goods and services
is called total utility. It depends on the level of
consumption—more consumption generally gives more
total utility.

TU = U1 + U2 + U3 + U4
Marginal utility is the utility a consumer derives from
the last unit of a consumer good she or he consumes.
It is also defined as the addition to total utility
derived from the consumption of one additional
unit.
More precisely MU is the change in total
consumption resulting from the consumption of one
additional unit.
MU = ∆TU / ∆Q
 The Law of Diminishing Marginal Utility
According to Alfred Marshall
‘the additional utility which a
person derives from the
consumption of a commodity
diminishes, that is Total Utility
increases at an diminishing rate
‘Since utility depends intensity
of the need of commodity
For example: suppose you are
very thirsty and you are offered
soda to drink. The utility derived
from the first case will be the
highest and will decrease as
one will consume more cases of
soda.
Total Utility & Marginal Utility
 The Law of Diminishing Marginal Utility
Assumptions of the Law: The law of diminishing
marginal utility holds under certain conditions or
assumptions.
Suitable units: All the units of a commodity must
be same in all respects
Continuous use: There must be continuity in
consumption
Nature of product remains same
Income, Taste and preferences remain unchanged:
There should be no change in taste during the
process of consumption
Exceptions of the Law:
Knowledge
Money
Music
Hobbies
 Consumer Equilibrium
MU schedules of various commodities may not be the
same, some yield higher and some lower.
A rational consumer consumes commodities in the
order of their utilities. He picks commodity yields
highest utility, then second highest and so on. He
switches his expenditure from commodity to another
in accordance with their MU and continue to switch
where MU of each commodity per unit of expenditure
is the same.
Law of Equi-marginal utility: It 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. MUe= MUx/Px
 The Law of Equi- Marginal Utility
Suppose a man purchases two goods X and Y whose
prices are PX and PY, respectively. The law of equi-
marginal utility can, therefore, be stated thus: the
consumer will spend his money income on different
goods in such a way that marginal utility of each good is
proportional to its price. That is, consumer is in
equilibrium in respect of the purchases of two goods X
and Y when MUx / Px = MUy / Py
Now, if MUx / Px and Muy / Py are not equal and MUx / Px is
greater than MUy / Py then the consumer will substitute
goods X for goods Y. As a result of this substitution the
marginal utility of goods Y will rise. The consumer will
continue Substituting goods X for goods Y till MU x / Px
becomes equal to MUy / Py When MUx/ Px becomes equal
to the Muy / Py consumer will be in equilibrium.
 Consumer Equilibrium
Suppose consumer has six rupees that he wants to
spend on apples and bananas in order to obtain
maximum total utility. The following table shows
marginal utility (MU) of spending additional rupee
of income on apples and bananas:
Money
MU of apples MU of bananas
(Units)
1 10 8
2 9 7
3 8 6
4 7 5
5 6 4
6 5 3
 Consumer Equilibrium
The above schedule shows that consumer can spend six
rupees in different ways, the price of one apple is Rs. 1
and price of one banana is Rs.1:
$1 on apples and $5 on bananas. The total utility he can get
is:[(10) + (8+7+6+5+4)] = 40.
$2 on apples and $4 on bananas. The total utility he can get
is:[(10+9) + (8+7+6+5)] = 45.
$3 on apples and $3 on bananas. The total utility he can get
is:[(10+9+8) + (8+7+6)] = 48.
$4 on apples and $2 on bananas. This way the total utility is:
[(10+9+8+7) + (8+7)] = 49.
$5 on apples and $1 on bananas. The total utility he can get
is:[(10+9+8+7+6) + (8)] = 48.
Total utility for consumer is 49 utils that is the highest
obtainable with expenditure of $4 on apples and $2 on
bananas. Here the condition MU of apple = MU of banana
i.e 7 = 7 is also satisfied. Any other allocation of the last
Rs. shall give less total utility to the consumer.