CONSUMER BEHAVIOUR

ANALYSIS

Prepared by Dr Snigdha Sarkar

Assistant Professor
KIIT School of Law

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  What Is Consumer Theory?

Consumer theory is the study of how people decide to

spend their money based on their individual preferences
and budget constraints.
A branch of microeconomics, consumer theory shows
how individuals make choices, subject to how
much income they have available to spend and the prices
of goods and services.
Understanding how consumers operate makes it easier
for vendors to predict which of their products will sell
more and enables economists to get a better grasp of
the shape of the overall economy.

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  IMPORTANT POINTS

1. Consumer theory is the study of how people

decide to spend their money based on their
individual preferences and budget constraints.
2. Building a better understanding of individuals'
tastes and incomes is important because these
factors impact the shape of the overall economy.
3. Consumer theory is not flawless, though, as it
based on a number of assumptions about
human behaviour.
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MARKET ANALYSIS MARKET ANALYSIS INCLUDES

CONSUMER
DEMAND ANALYSIS UTILITY ANALYSIS
BEHAVIOUR ANALYSIS

PRODUCER PRODUCTION AND

SUPPLY ANALYSIS
BEHAVIOUR ANALYSIS COST ANALYSIS

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Consumer Behaviour Analysis

Consumer Behaviour Analysis

UTILITY ANALYSIS

CARDINAL U.A. ORDINAL U.A.

LAW OF LAW OF EQUI- INDIFFERENCE

Diminishing MARGINAL CURVE
M.U. UTIITY ANALYSIS

Consumer’s equilibrium analysis

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 MEANING OF UTILITY
1. Want satisfying power of a good and service
2. It is introspective in nature
3. Utility is additive in nature
4. It is not equal to usefulness
5. It is neutral in terms of ethics

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 CARDINAL AND ORDINAL UTILITY
Cardinal utility analysis:
Cardinal utility analysis is the oldest theory of
demand or consumer behaviour. It tells us that we
can measure utility in terms of numbers.
Ordinal utility analysis:
Here we can rank and order individual’s preferences
instead of measuring the exact value. It is difficult
to assign number but easy to rank our preferences
as per their importance and need.
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 TYPES OF CARDINAL UTILITY
1. TOTAL UTILITY: The sum of all utilities derived from the
consumption of different units of a particular good at a particular
time and given price.
Or
The sum of all utilities derived from the consumption od different
goods by a particular individual at a particular time and given price.

𝑇𝑈𝑥 = 𝑈𝑥1 +𝑈𝑥2 +𝑈𝑥3 +𝑈𝑥4

( the person has consumed upto 4th unit of good x)
𝑇𝑈𝑥 = 𝑈𝑥1 +𝑈𝑥2 +𝑈𝑥3 +----------------------------+𝑈𝑥𝑛
(the person has consumed up to nth unit good x)
In case of consumption of multiple goods TU can be calculated by
the following formula:
TU= 𝑇𝑈𝑥 +𝑇𝑈𝑦 +𝑇𝑈𝑧 +----------------------------+T𝑈𝑛

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2. Marginal utility: it is otherwise known as extra or
additional utility. Utility derived from marginal or the last
unit consumed of a particular good at particular time and
price. Additional or extra utility derived from the
consumption of an extra unit of a commodity.
It can be calculated with the help of following formulas:
𝑀𝑈𝑥 = 𝑇𝑈𝑛 − 𝑇𝑈𝑛−1 …………………..(i)
𝑇𝑈𝑛 = total utility derived from consumption of nth unit
of a commodity.
𝑇𝑈𝑛−1=total utility derived from consumption of (n-1)th
unit of a commodity.
∆𝑇𝑈
𝑀𝑈𝑥 = … … … … … … … … … (ii)
∆𝐶
∆𝑇𝑈= 𝑇𝑈𝑛 − 𝑇𝑈𝑛−1
∆𝐶=1(one additional or extra unit of consumption)

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 Schedule of TU and MU
Cups of tea consumed at a TU MU
specific time
0 0 0
1 12 12 (12-0)
2 22 10 (22-12)
3 30 8 (30-22)
4 36 6 (36-30)
5 40 4 (40-36)
6 40 0 (40-40)
7 39 -1 (39-40)
8 34 -5 (34-39)
TU=∑𝑀𝑈

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 LAW OF DMU/GOSSEN’S 1ST LAW
• It was 1st introduced by H.H. Gossen (Hermann Hinrich
Gossen) in the year 1854. that’s why this law is famous as
Gossen’s 1st law. This is the fundamental law on which
cardinal utility analysis of consumer behaviour is based.
• “The additional benefits that a person derives from a given
increase in his stock of a thing diminishes with every
increase in the stock that he already has.” Marshall
• “As a consumer increases the consumption of any one
commodity per unit of time. The utility derived by the
consumer from the successive units goes on diminishing
provided that consumption of all other goods remains
constant.” General definition.

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 ASSUMPTIONS
1. Taste and preferences of the consumer remains same
during the whole process.
2. The units of the commodities consumed must be
homogenous.
3. Continuous consumption process: There is no time
gap between consumption.
4. No change in the price and quality of the commodity.
5. Consumer must be a rational consumer.
6. There is no change in the habit, taste, fashion,
temperament and income of the consumer.
7. Utility is measured in “utils”.

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 Schedule
Units consumed Total utility Marginal utility
1 40 40 (40-0) 𝑇𝑈1 − 𝑇𝑈1−1

2 70 30 (70-40)
𝑇𝑈2 − 𝑇𝑈2−1
3 90 20 (90-70)
𝑇𝑈3 − 𝑇𝑈3−1
4 100 10 (100-90)
𝑇𝑈4 − 𝑇𝑈4−1
5 100 0 (100-100)
𝑇𝑈5 − 𝑇𝑈5−1

6 90 -10 (90-100)
𝑇𝑈6 − 𝑇𝑈6−1

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Graphical illustration

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 Explanation of different stages of
consumption
• Stage I-in the 1st stage both TU and MU are positive. TU is
rising and MU is falling with each extra units of
consumption of the same good.
• Stage II- TU and MU are positive and constant. Where TU is
maximum and MU is minimum i.e. 0. this indicates the
situation of maximum satisfaction or maximum capacity of
consumption or in graphical terms this point is known as
the point of Satiety.
• Stage III- TU and MU both are falling. But TU is positive and
MU is negative which is showing dis satisfaction of the
consumer. It means if the person will consume more of the
said commodity then it may create negative health impact
on the person.

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 EXCEPTIONS
(i) Case of intoxicants: The more a person drinks liquor,
the more s/he likes it.
(ii) Rare collection: If there are only two diamonds in the
world, the possession of 2nd diamond will push up the
marginal utility.
(iii) Application to money: It is true that more money the
man has, the greedier he is to get additional units of it.
However, the truth is that the marginal utility of money
declines with richness but never falls to zero.
(iv) Hobbies
(v) Stock of Money
(vi) All precious things
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 Practical Importance
of Law of Diminishing Marginal Utility
(a) Diversification in Production:
To overcome the resistance of the consumers towards
using the same kind of good and in order to secure
higher profits, the producers continuously introduce
newer varieties of the products with new design,
shape, colour, technique and presentation.
(b) Household Expenditure:
Since larger purchases reduce marginal utility, we
restrict the purchase of a particular commodity.
Diversification in purchase or consumption is
possible because of this law.
(c) Pattern of Public Expenditure:
The public expenditure should be planned in
such a manner that more is spent for the benefit
of the poor. The law of diminishing marginal
utility provides justification of the socialist plea
for an equitable distribution of wealth.
(d) Basis for Progressive Taxation:
Progressive taxation results when the rate of
taxation increases with an increase in income of
the consumer. As the rich have lower marginal
utility of money as compared to the poor people
due to greater stock of money, they should be
taxed at a higher rate.
 Criticism
1. It is wrong to assume that taste and preferences of
the consumer remains same during the whole
process.
2. It is impractical to assume the units of the
commodities consumed must be homogenous.
3. Continuous consumption process is an illusion
practically it is not possible for a ration human being.
4. the price and quality of the commodity is always
changing in nature.
5. It is impossible that habit, taste, fashion,
temperament and income of the consumer remains
same through out the procedure.

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 CONCLUSION
• we can say that the law of diminishing utility,
like other laws of Economics, is simply a
statement of tendency. It holds good,
provided other factors remain constant.

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