The Theory of Consumer Behavior

The Theory of Consumer Behavior

1. The Theory of Consumer Behavior

2. THE UTILITY FUNCTION Consumer Theory describe how consumers make decisions on what to buy. Consumption refers to the use of goods and services to satisfy human wants directly.

3. Utility is the term used for satisfaction. Utility is something intangible. As such,it is not easy to measure. Quantifiable goods are subject to measurement; they can be expressed in numerical values. In order to make it easy to understand the concept of utility, we shall assume that it is measurable in units, which we shall call utils . A util is one unit of satisfaction. Important measures of utility are: Total Utility and Marginal Utility refers to the combined utility derived from consuming certain units of a good. Marginal Utility derived from consuming certain units of a good. Marginal Utility refers to the additional utility derived from consuming an additional unit of the good.

4. Let us study the following utility schedule of consumer Table Hypothetical Utility Schedule for Chocolate Candy Quantity of Consumption Total Utility Marginal Utility 1 8 8 2 15 7 3 21 6 4 26 5 5 30 4 6 33 3 7 35 2 8 36 1 9 36 10 35 -1

5. When he eats the first bar, he gets a utility of 8. The second bar gives him a utility of only 7. We see that while his total utility increases with each additional chocolate from each additional unit starts to diminish. Notice that upon eating his ninth bar, his total utility does not change at all, which means that there is no additional utility derived from the ninth unit. That’s why marginal utility at 9 units of consumption is equal to zero. Look at what happens as he consumes the tenth bar. Instead of Increasing, the total utility declines and marginal utility is even negative. Are there physical manifestation of a negative marginal utility? Physical discomforts such as an upset stomach, dizziness, and indigestion are sign that instead of adding to one’s utility, the consumption of the additional unit of the good has resulted in the decrease of total utility derived.

6. Law of Diminishing Marginal Utility The law states that as additional units of a good are consumed, the additional utility derived from each additional units tends to diminish. The reason for this behaviour is the satiation of human wants. Man’s wants can be fully satiated at a given time. That is why owner of vikings , Dad’s or buffet 101 do not lose money even if people are free to eat all they can. At some point, they will simply give up eating because their wants have been satisfied.