THE THEORY OF CONSUMERS’ BEHAVIOURS
A consumer is an individual who buys products or services for personal use and not for
manufacture or resale. A consumer is always faced with a problem of allocating a fixed income
among a variety of available options.
A consumer is assumed to be rational i.e. given his income and the market prices of the various
commodities; he plans the spending of his income so as to attain the highest possible utility.
DEFINITION OF CONCEPTS
Utility
This is the satisfaction derived from consuming a certain amount of a good or service. OR
Utility is the ability of a commodity to give satisfaction for example water has utility because it
can quench your thirst.
Utility can be measured in monetary units by the amount of money a consumer is willing to
sacrifice for a given amount of a commodity.
Total utility
This refers to the total satisfaction obtained from the consumption of all possible units of a
commodity.
Marginal utility
This is the additional satisfaction derived from consuming an extra unit of a commodity.
Marginal utility is calculated as follows.
C h ange ∈Total Utility
Marginal utility =
C h ange ∈number of units
∆ TU
MU=
∆Q
The concepts of total utility and marginal utility can be better understood from the
following schedule and diagram.
Units Total Marginal
consumed Utility Utility
0 0 −
1 20 20
2 37 17
3 47 10
4 52 5
5 52 0
6 47 −5
7 35 −12
From the schedule and the diagram above, we note the following;
As total utility is increasing, marginal utility is falling but positive.
When total utility is at its maximum (point of satiety), marginal utility is zero.
When total utility is decreasing, marginal utility becomes negative and this
shows disutility.
Disutility
This is the loss of satisfaction due to consumption of so many units of a
commodity
THE LAW OF DIMINISHING MARGINAL UTILITY
It is states that as more and more units of a commodity are consumed in
succession, the satisfaction derived from each additional unit consumed reduces.
ASSUMPTIONS UNDERLYING THE LAW OF DIMINISHING
MARGINAL UTILTIY
It assumes that the consumer aims at utility maximization.
The consumer has a fixed level of income.
The commodity prices are fixed and constant.
The consumer has perfect knowledge about the prevailing market conditions
The consumer’s tastes and preferences and preferences are constant.
It assumes consumption of only one commodity whose units are homogeneous.
It assumes that the commodity has uniform sizes i.e. the commodity is divisible
into similar portions.
It assumes continuity in consumption i.e. the units of the commodity should be
consumed in succession one after the other.
It assumes that the consumer does not develop addiction to the commodity. It
assumes that utility is measurable in monetary units (utils).
It assumes that the commodity consumed is a normal good.
RELATIONSHIP BETWEEN MARGINAL UTILITY AND THE DEMAND
CURVE
The derivation of the demand curve is based on the law diminishing marginal
utility. Marginal utility is the slope of the total utility curve.
As marginal utility declines, the consumer is willing to pay less for the
commodity. The consumer can buy more if the price is reduced since marginal
utility is low.
When fewer units of the commodity are available, marginal utility is high and the
consumer is willing to pay high prices for the commodity. This implies that
demand is more at lower prices and less at high prices.
If marginal utility is measured in monetary units, then the demand curve for the
commodity is identical to the positive segment of the marginal utility curve.
Sample questions
Distinguish between price and marginal utility. (02 marks)
What is the relationship between marginal utility and price? (02 marks)
With the help of illustrations, show the relationship between marginal utility and
demand.
LIMITATIONS/ CRICISIMS/ DEFECTS OF THE LAW OF
DIMINISHING MARGINAL UTILITY
It assumes that consumers are rational which is not always the case. Many
consumers do not attach cardinal values on commodities being consumed.
It assumes that the units of the commodity consumed are homogeneous which is
unrealistic. Units of the same commodity may be different e.g. when consuming a
sugarcane.
It assumes constant tastes and preferences yet for the same individual; tastes and
preferences keep on changing from time to time depending on the environment,
age, fashion, etc.
Consumption is not always continuous i.e. the consumers take breaks when
consuming commodities.
It assumes that commodities are divisible into standard sizes but this does not
apply to all commodities e.g. furniture, vehicles, etc.
The law is not applicable to money because the more money one gets, the more
marginal utility he/she gets.
It is not applicable under habitual consumption where marginal utility increases as
the consumer consumes more of the commodity.
It is not applicable in situations where the commodity prices keep on changing due
to inflation.
The assumption that the consumer’s income is fixed is unrealistic.
Utility cannot be measured as the law assumes i.e. there is no instrument which
can be used to measure utility.
The law is not applicable in situations of joint demand where two commodities are
consumed at the same time. This is because it assumes consumption of only one
commodity at a time.
In most cases, the consumers are ignorant about the market prices of commodities.
This violates the assumption of perfect knowledge of the consumer about the
market price.