Scribd
Upload
7 views12 pages

Understanding Utility in Consumer Behavior

1) The document discusses concepts of utility, total utility, and marginal utility in consumer behavior theory. It provides an example where a consumer's total and marginal utility is measured from consuming oranges. 2) It introduces the concepts of cardinal utility, which views utility as quantitatively measurable, and ordinal utility, which sees utility as only able to be ranked. It also discusses indifference curves and how they depict combinations of goods that provide the same utility. 3) The document discusses marginal rate of substitution and how the convex shape of indifference curves illustrates that as one good is substituted for another, the rate of substitution decreases.

Uploaded by

Muhammad Usman Ghani
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
7 views12 pages

Understanding Utility in Consumer Behavior

1) The document discusses concepts of utility, total utility, and marginal utility in consumer behavior theory. It provides an example where a consumer's total and marginal utility is measured from consuming oranges. 2) It introduces the concepts of cardinal utility, which views utility as quantitatively measurable, and ordinal utility, which sees utility as only able to be ranked. It also discusses indifference curves and how they depict combinations of goods that provide the same utility. 3) The document discusses marginal rate of substitution and how the convex shape of indifference curves illustrates that as one good is substituted for another, the rate of substitution decreases.

Uploaded by

Muhammad Usman Ghani
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd

THE THEORY OF

CONSUMER BEHAVIOR

THE CONCEPT OF UTILITY AND ITS


RELATION TO
THE VALUE OF GOODS AND SERVICES
The satisfaction of a consumer
derives from the consumption of
commodities is termed Utility by
economists.

Suppose a consumer eats five oranges.


The total satisfaction he gets from this is
called total utility.
Suppose he now consumes an extra
orange. The extra satisfaction he gets
from consuming this orange is called the
Marginal Utility.

Total and Marginal Utility


Number of Oranges

Total Utility

Marginal Utility

20

20

35

15

45

10

50

53

55

56

56

55

-1

10

53

-2

Adam Smith distinguished between


value in use and value in exchange
and gave the famous example of
diamonds and water.
Diamonds have a high price (value in
exchange), but they are unnecessary
for life (a low value in use). Water has
a low price (value in exchange) but is
necessary for life (a high value in use).

CARDINAL AND ORDINAL


UTILITY
Is utility measurable?
The cardinal utility theory says that it is
measurable just as prices and quantities
are.
That is, we can assign a number of utils
to each commodity.
for example,
An orange = 5 utils
An apple = 6 utils

The ordinal utility theory says that


utility is not measurable like prices and
quantities.
In the cardinal utility theory, TU and
MU are both measurable.
Diminishing Marginal Utility.
Utility is measurable but also additive.
Utility is measurable but not additive.

In mathematical terms, we say that utility is a


function of the quantity consumed of all the
commodities. If there are two commodities,
we
write this function as:
U = U(x1, x2)
Where U = utility, and x1 and x2 are the
quantities consumed of the two goods.

With additive utility, we can write


U(x1, x2) = U1 ( x1 ) + U 2 ( x2)
Where,
U1 ( x1 ) is the utility derived from the
consumption of the first good alone.
U

( x2) is the utility derived from the

consumption of the second good alone.

INDIFFERENCE CURVES
An indifference curve shows
combinations of two commodities
that a consumer is indifferent about.
It gives the combinations from which
the consumer derives the same
utility or level of satisfaction. Thus, it
can also be called an iso utility curve
(iso means same).

Why have we drawn the IC as


downward sloping?
If both apples and oranges give positive
satisfaction to the consumer, then
increasing the number of apples while
holding the number of oranges constant
would increase the consumers total
utility.
So, if we want to hold the utility constant,
as the number of apples increases, some
oranges will have to be taken away.

MARGINAL RATE OF SUBSTITUTION


AND CONVEXITY OF INDIFFERENCE
CURVES
Bundle
Oranges
Apples
A

15

17

You might also like