class 11 eco consumer behaviours

theory of consumer

Saturday, March 27, 2021 7:21 PM

Unit 2 : theory of consumer behavior
What is utility ? Define total utility and marginal utility .

Utility :-The level of happiness or satisfaction that consumers receive from the consumption of
goods and service is called utility . In other words utility is the human want satisfying power of
quantity of goods and services .
1 ) Total utility:=total utility is the overall level of satisfaction obtained by consumer by
consuming various units of goods . In other words, sum of marginal utility is called total utility

#2) marginal utility:- Marginal utility is defined as the change in total utility due to a unit change
in consumption of the goods . In other word , the difference in total utility received from two
successive units of consumption is called marginal utility

Explain law of diminishing marginal utility with table and figure

Concept
The law of diminishing marginal utility was firstly developed by German economist H.H Gosse in
1854 AD. This law says that consumer gets less and less satisfaction with every increase in units
of consumption within same period of time .later on the new classical economist, Alfred
Marshall developed this law scientifically in 1890 AD in his book principle of economics
Statement: The law of diminishing marginal utility said that when a consumer consumes more
and more units of commodity , consumers will derive less and less units of utility from the
additional units of consumption .
For example : A thirsty person get highest satisfaction when he drink first glass of water. But
second glass of water gives him less satisfaction than first glass of water. Similarly third glass
gives less satisfaction than second .
Assumptions:- diminishing marginal utility is based on based on upon following assumption
1)consumers are rational person.
2)utility can be measured in Cardinal number.
1) Constant marginal utility of money.
2) No time gap in consumption
3) Homogenous and reasonable size of goods
4) No change in preference of a consumer
Explanation
The law of diminishing marginal utility can be explained with the help of following table

Units of commodity Total utility Marginal utility

o 0-

1 10 10

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2 18 8

3 24 6

4 28 4

5 30 2

6 30 0

7 28 -2

Table:- Diminishing marginal utility

The data given given in the above table shows the various units of community and additional

utility derived from each unit of commodity in utils .No consumption means no utility .when

consumer consumes first units of goods his total utility and marginal utility is 10 utils . As he

consumes second units of goods , his addition satisfaction diminishes to 8 units (i.e. 18-10=8) .It

is clear from table that consuming each successive units of goods , the marginal utility diminish

up to 5th units ,In 6th units marginal utility is zero an Negative from the 7th units.

It can be further explained by following figure

units of goods

Fig : law of diminishing marginal utility

In given figure, quantity of goods is measured in along X axis .utility is measured along Y axis .TU
curve is formed by plotting the units commodity and total utility .Whereas MU curve is obtained by
plotting marginal utility . The marginal utility curve is down ward sloping . The portion below the X
axis indicate negative utility .
It can be observed from figure, as a consumer consumes an additional units of a commodity , MU
diminishes gradually becomes zero even negative .As long as marginal utility is positive , the total
utility increase in decreasing rate . TU becomes maximum when MU becomes zero. As MU becomes
negative TU start to decline . The point where the MU zero is called point of satiety point.

Limitation of the law
The conditions under which this law is not applicable are called the limitation or criticism of this law .
The law of diminishing marginal utility is not applicable in case of the following situation .
1) Rare and curious goods :- marginal utility goes on increasing for rare and curious like old stamp,
old coin rather than decreasing. So, the law of diminishing marginal utility does not hold true for
rare and curious goods .

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rare and curious goods .
2) Habitual Goods: when the consumer consumes habitual goods like alcohols drugs etc., the
additional level of satisfaction goes on increasing rather than decreasing.

1) Goods of interments : marginal utility does not decrease in case of goods of entertainment like
popular TV ,T20 cricket . The further watching of these provides more entrainment so. The law of
diminishing marginal does not hold in case of goods of entertainment .

1) Unequal size and quality : Big size community provides higher satisfaction then smaller
size .Likewise the superior quality commodity provides higher satisfaction. If second units of
community is big in size and super in quality then first unit, the law of diminishing marginal utility
does not apply

2) Not applicable in case of irrational consumer Rational consumer having complete knowledge
can calculate evaluate compare utilities and maximize the utility obtained from goods . So this
law does not apply in case irrational consumer .

3) utility cannot be measured in Cardinal number: These theory assumes that the satisfaction can
be measured in utils .But the critics said that utility is internal feeling of consumer. It differs
person wise. So it can be ranked like more or less but cannot count in cardinal number.

4) Other limitation of law
i) Time gape in consumption

Ii) .change in taste and preference
Iii) Collection of money
Iv)Change in income
v) Durable commodity

Explain the law of substitution
OR
Explain law of equi- marginal utility .
Concept
The concept of law of substitution was firstly develop by German economist H.H. Gossen in
1854 AD. It is also known as second law of Gossen . It is the extension of law of of diminishing
marginal utility . The law of substitution explains consumers equilibrium about multi-commodity
case. Consumers allocate their scare resources to purchase various goods in order to get
maximum satisfaction. Later on neoclassical economist Alfred Marshall developed the law
scientifically
Statement
This law states," in order to maximize the utility, the consumer allocates his income on various
goods in such a way that the ratio of marginal utility to price of each goods be equal to marginal
utility of money."

Assumptions
1) Consumers should be rational
2) cardinal measurement of utility
3) application of law of diminishing marginal utility
4) utilities are independent .
5) price of goods is given .
6) Marginal utility of money is constant.
7) Money income of consumer is given and fixed .

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Explanation :
Consumer will be equilibrium at that point where the last units of rupees spend on it gives
same amount of marginal utility .
, mathematically

So it is called law of equi- marginal utility .To maximize the utility , consumer substitute the

one commodity with less utility by higher utility until the ratio are equal .
Hence it is known as law of substitution and law of maximum satisfaction

The law is further explain with help of the an example. Let us suppose that a person has 7
units of money and two goods 'X' &'Y'

Units of goods Marginal utility of X Marginal utility of Y

1 28 24

2 24 20

3 20 16

4 16 12

5 12 8

68 4

74 0

. Table: law of substitution
from above table, the commodity 'X' is the high preference of consumer then 'Y'. so,
consumer prefer to take first unit of'' X' then 'Y'. In second units there is no difference
between 'X' &'Y'. For three units of consumption it is better to take two units of 'X' and one
units of 'Y'. It is because both have same marginal utility and total utility is (28+24+24=
76).Total utility is maximum then other combination. In the process of consuming more and
more goods, consumer substitutes the goods of lower utility by higher utility until marginal
utility are equal .If consumer spend 7 unites of rupees ,consumer consumes 4 units of 'X' and
3 units 'Y'. It is because last units of both goods have marginal utility is 16. Total utility is (88+
60) which is highest then other combination.
It can be further explain with the help of following figure.

.
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.

fig : law of substitution
in the above figure , marginal utility is measured along Y-axis and units of goods on X-axis.

represents the marginal utility curves of x and Y curves respectively. The
quilibrium line passes through 16 units shows thea consues is in equilibrium by conduming 4 units
of X and 3 units o Y . If conumes attemapt to consume one units of X nore, conume get X4X5 fa.But
scrtifice 1 nits o fY and conumer get loss Y3 ebY2 which is grreater tha the X4X5 fa.Therefore , it is
not benifical to rearrange the combination of goods tor cnsummption

Limitations of law of substitution ( law of Equi-marrginla utility)

1) diminishing marginal utility does not apply forever: the diminishing utility is not applicable in
all cases for all goods and all consumers . The theory cannot explain the consumers behavior's
in case of the increasing marginal behavior in case of increasing marginal utility .All the
examples given to illustration the diminishing marginal utility are artificial

2) Marginal utility of money is not constant : the theory assumes , money measures the marginal
utility of goods and marginal utility money is constant .But marginal utility of money cannot
constant and it varies person to person , time to time and it situation of consumer

3) Utility are dependent: this law assumes that utilities derived from various goods are
depended .In reality , utilities from various goods are depended to each other .

4) Not applicable in case of irrational consumer Rational consumer having complete knowledge
can calculate evaluate compare utilities and maximize the utility obtained from goods . So this
law does not apply in case irrational consumer

5) utility cannot be measured in Cardinal number: These theory assumes that the satisfaction
can be measured in utils .But the critics said that utility is internal feeling of consumer. It differs
person wise. So it can be ranked like more or less but cannot count in cardinal number.

Explain the concept of consumer surplus

Introduction :
The concept of consumers surplus was originally introduce by economist AJ Dupit in 1844 A.D.
to measure the social welfare. However, this concept was further developed by Alfred Marshall
in his Book "Principles of Economics" in 1890 AD .A consumer gets surplus when the price paid
is lower than willing to pay .Thus, the difference between willing to pay and actual price is
called consumer's surplus is called consumer surplus.
Thus, consumer surplus=WP-AP
Where, WP=willing to pay

AP= actual pay

Assumptions:
1) Expected price should be more than actual price .
2) Marginal utility must be greater or equal to price of the commodity
3) Utilities can be measured in cardinal numbers
4) Consumers are rational person

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4) Consumers are rational person

The mathematical example of consumers' surplus is given below

Units of goods Willing to pay(MU) Actual pay Consumer Surplus

1 40 10 30

2 30 10 20

3 20 10 10

4 10 10 0

total 100 40 60

The calculation of consumer surplus is shown in the above table the total willing g price
100 and actually paid price is 40 .So, consumer's surplus =100-40
The graphical presentation of consumers surplus is give n below

price

quantity demand
Fig: consumer surplus
in the figure , price and quantity demand are shown on X-axis and Y-axis respectively
The area below the demand curve and above the price line is consumer surplus .It is denoted by
shaded area. From the figure , consumers surplus=area of OABQ-of OPBQ

Explain producer surplus
The net benefit received by producer is called the producer surplus . It is the difference
between the current market price and cost of production
Symbolically
producer surplus = current market price - minimum acceptable price
It can be explain with the help of following table
table book page 103

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