Consumers Behaviour

Consumer's Behaviour

Prof. Stanley Jevons says that utility is the capacity of a goods to satisfy human want.

Teaching Points
2.1     Introduction
2.2     Features of Utility
2.3     Types of Utility
2.4     Concepts of Utility
2.5     Law of Diminishing Marginal Utility (Based on relationship between TU and MU)
2.6.    Law of Equi-Marginal Utility

Teaching Objectives
To enable the students to understand the concept of utility and to know how utility goes on diminishing with every successive unit of commodity consumed and about equi-marginal utility.

The more you have it, the lesser is the want for it.

2.1     Introduction
In the first chapter, we. have studied that Micro Economics deals with the behaviour of individual units of the economy.

In practice, every individual tries to satisfy his wants with available resources. It is true that human wants are unlimited, so all human wants cannot be satisfied at a time. However, a particular want can be satisfied fully at a specific time. Here, the study of consumer's behaviour, i.e., utility analysis explains, the want satisfying efforts by a consumer to maximise satisfaction.

Generally, utility means usefulness of a commodity, but in Economics, utility means want satisfying power of a commodity.

According to Prof. Stanley Jevons, "utility is the capacity of a commodity to satisfy human want".

2.2     Features of Utility
         1.       Relative concept
         2.       Subjective concept
         3.       Ethically neutral
         4.       Utility and usefulness are not same
         5.       Not same as pleasure
         6.       Utility differs from satisfaction
         7.       Not easily measurable
         8.       Depends upon intensity of want
         9.       It is the basis of demand

1.       Relative concept - Utility is related to time and place. It differs from time, to time and place to place. e.g. Cotton clothes in summer and woollen clothes in winter have greater utility. Similarly, woollen clothes have more utility in Kashmir than in Mumbai.

2.       Subjective concept - Utility of a commodity cannot be same for all individuals. It differs from-person to person, due to differences in taste, preference, choice, liking, etc., of the people. e.g. Utility of a book is greater for an educated person than an illiterate person.

3.       Ethically neutral - The concept of utility has no ethical consideration: It is morally neutral. A commodity which possesses utility may satisfy any want. It does not make any difference between good, bad, moral or immoral etc. e.g. Knife has utility for a housewife to cut vegetables and for a killer to harm somebody.

4.       Utility and usefulness are not same - Utility is the want satisfying power of a commodity, whereas usefulness is the benefit derived by a consumer. Utility expresses level of satisfaction of a consumer and usefulness indicates value in use of a commodity. A commodity which possesses utility may not be useful. e.g. A cigarette has utility for a smoker, but it does not have usefulness as it is injurious to health.

5.       Not same as pleasure - Utility and pleasure are different. A commodity may have utility, but its consumption may not provide pleasure or happiness. e.g. An injection has utility for a patient but it is painful, so it does not give pleasure.

6.       Utility differs from satisfaction - Utility and satisfaction are inter-related terms but there is a difference. Utility is the capacity of a commodity to satisfy human wants. Satisfaction is the feeling of happiness realised by the consumer Utility is related to the commodity, whereas satisfaction is experienced by a person. Utility is anticipated satisfaction but satisfaction is the actual realisation.

         Thus, utility is the starting point  of consumption and satisfaction is the rend result of consumption.

7.       Not easily measurable - Utility is a psychological concept. It is invisible and intangible. It cannot be, measured cardinally i.e., in numbers. However, one can ordinally measure it. e.g. A thirsty person after drinking water, may derive higher or lower level of utility.

8.       Depends upon the intensity of want - The utility of a commodity depends upon the intensity or urgency of a want. The more urgent is the want, the greater is the utility and vice versa. As the urgency of want declines, utility diminishes. e.g. Utility of food is higher for a hungry person and utility declines with the satisfaction of hunger.

9.       It is the basis of demand - Utility forms the basis of demand. If a commodity does not give any utility, a person may not demand it. He will demand a commodity only, if it gives him utility. e.g. Demand for pen is more from students because utility of pen is more for them.

2.3     Types of utility
         1.       Form utility
         2.       Place utility
         3.       Time utility
         4.       Service utility
         5.       Knowledge utility
         6.       Possession utility

         Various types or forms of utility are as follows­

1.       Form utility - When utility increases due to the change in the shape or structure of existing material, it is called farm utility.
         Toys made out of clay, making furniture from wood, a dress from fabric, etc., are some examples of form utility.
2.       Place utility - When utility of a commodity increases due to the change in the place of utilisation, it is also created with the transfer of goods from the place of production to the place where they are consumed. e.g. Sea sand has more utility in construction work than along the sea shore.

3.       Time utility _When utility of a commodity increases with a change ; in the time of utilisation, it is called time utility. e.g. Umbrellas have greater utility during rainy season than in winter.
         Time utility also refers to storing of goods and using at the time of need or scarcity.
4.       Service utility - It arises when personal services are rendered by various professionals in the society to others. Services provided by doctors to patients, knowledge given by teachers to students, suggestions by lawyers to his clients, etc.,   are examples of service utility. In this case, production and consumption both. fake place at the same time.

5.       Knowledge utility - It increases when a consumer acquires knowledge about a particular product. e.g. Utility of. a mobile phone or computer increases when a person knows about its various functions.

6.       Possession utility - It arises when the ownership of goods is transferred from one person to another. e.g. Possession utility is enjoyed by the consumers when they purchase goods from sellers.

2.4     Concepts of utility
There are two main concepts of utility, as follows:-­
         1.       Total utility
         2.       Marginal utility

         1.       Total utility refers to the sum of utilities derived by the consumer from all units of a commodity consumed. It is an aggregate of utilities from all successive units of a commodity.

TU = SMU or TUn = MU1 + MU2 + MU3 .... MUn

         TU = Total Utility. MU = Marginal Utility.

         2.       Marginal utility refers to the additional, utility derived by a consumer from additional unit of a commodity consumed. It is the utility from the last unit of a comniodity. In short, MU is the addition made by last unit to TU.

Relationship between total utility and marginal utility can be explained with the help of the following schedule and diagram:-
Total Utility and Marginal Utility Schedule

Table No. 2.1
Unit of Commodity
TU Unit
MU Unit
1
8
8
2
14
6
3
18
4
4
20
2
5
20
0
6
18
-2

         The above given schedule indicates MU and TU derived from each unit of a commodity.

Graphical representation of TU and MU



Fig. No. 2.1

The above given schedule land diagram explain that:-­
1.       Initially, total utility and marginal utility are equal. (TU=MU)
2.       From the consumption of second unit, total utility increases at a diminishing rate and marginal utility goes on decreasing. So TU curve slopes upward and MU curve slopes downward. (TUT, MUJ.)
3.       When total utility is maximum; marginal utility is zero. It indicates point' of satiety (i.e. maximum satisfaction). At this point, TU curve reaches the highest level and MU curve touches the x-axis. (TU maximum, MU zero)
4.       When total utility declines, marginal utility intersects the `X' axis and becomes negative. It shows dissatisfaction of a consumer. In this case, TU curve starts falling and MU curve enters into the negative quadrant. (TUJ¯, MU negative)
         It is observed that total utility is always positive but marginal utility may be positive, zero or even negative.

2.5     The Law of Diminishing Marginal Utility
         Introduction
The law explains economic behaviour of a rational consumer. It is a common experience that the more we have of a commodity, less we desire to have more of it. This fact is expressed by the law of Diminishing Marginal Utility (DMU). It was first proposed by Mr. Gossen. So this law is known as Gossen's first law. However it was further explained in detail by Prof. Alfred Marshallin his book 'Principles of Economics' published in 1890.

Statement of the law
       According to Prof. Alfred Marshall, other thing being constant, 'the additional benefit which a person derives from the increase in the stock of a thing diminishes with- every increase in the stock that he already has.'
In simple. words, the law explains that marginal utility goes on diminishing with an increase in the successive unit of a commodity consumed.,
It can be graphically- represented with the help of the following schedule and diagram:-
Marginal Utility Schedule
Table No. 2.2
Unit of Commodity
MU
1
8
2
6
3
4
4
2
5
0
6
-2

Marginal Utility Curve


Fig No. 2.2
Explanation of the diagram:
In the above given diagram, 'X' axis indicates units of a commodity and `Y' axis measures MU. Various points of MU are plotted on the graph as per the given schedule. We get NW curve by joining these points.

MU curve slopes downward from left to right. It shows that MU goes on diminishing with every successive increase in the consumption of a commodity.

In this case, when a consumer consumes the fifth unit, MU becomes zero. So MU curve touches 'X' axis. It indicates full satisfaction level. It is called the point of satiety.

Beyond the point of satiety, further consumption of a commodity brings disutility. It is shown by negative marginal utility.

Thus, it explains that, MU diminishes with every increase in consumption of commodity.

Assumptions of the law
The validity of the law depends upon the following assumptions­
1.       Homogeneity
2.       Single use
3.       Cardinal measurement
4.       Rationality
5.       Continuity
6.       Reasonability
7.       Constancy
8.       Divisibility
9.       Constant marginal utility of money income

1.       Homogeneity - The law assumes that units of a commodity consumed by a consumer are uniform. They are identical or same in case of size, colour, shape, taste, quality, etc.

2.       Single use - Utility is multi-purpose for some goods which satisfy variety of wants. Here, it is assumed that a commodity is used to satisfy only a single want to experience the law.
3.       Cardinal measurement - Utility can be measured in numbers. So that, it is possible to know and compare utility derived from each unit of a commodity. It helps to understand the law.
4.       Rationality - A consumer is assumed to be a rational person and his behaviour is normal and therefore, he tries to maximise his satisfaction.
5.       Continuity - The units of a commodity are consumed in quick succession, one after another. MU will not diminish, if there is time interval.
6.       Reasonability - The units of commodity consumed, should be of a standard or normal size. They should neither be too big nor too small. e.g. a cup of tea, a glass of water, etc.
7.       Constancy - Income, taste, habits, liking, etc., of a consumer and price of a commodity remain constant throughout the period of consumption. It also assumes that MU of each unit of money remains constant.
8.       Condition of divisibility - The law assumes that the commodity consumed by the consumer is divisible so that it can be accquired in small quantities for quick consumption.
9.       Constant marginal utility of money income When the consumer spends his income, the utility of the remaining money income is the same as his total income.
The law holds true only, if the above given assumptions are fulfilled.

Exceptions of the law
         Certain cases are considered as an exceptions to the law, for which the law is not applicable. They are as follows:-

1.       Hobbies
2.       Misers
3.       Drunkards
4.       Music
5.       Power
6.       Reading
7.       Money

1.       Hobbies - In certain hobbies like collection of stamps, rare coins, precious paintings, etc., the law is not applicable because every additional increase in stock gives more pleasure, which increases MU. But it violates homogeneity condition.
2.       Misers - In case of miser, every additional rupee gives him more and more satisfaction, because he is a irrational person. So his MU tends to increase with an increase in the stock of money. However, it ignores rationality assumption.     
3.       Drunkards - It is said that, in case of drunkards, the level of intoxication increases with every additional unit of liquor consumed. So MU received by drunkards may increase. This condition is similar to all addicts. But here, rationality condition is violated.
4.       Music - Some people are fond of music. It is experienced that, a repeated of hearing of music, gives more and more satisfaction. It increases MU of music. So the law is not applicable. However, it does not fulfil the assumptions like homogeneity and continuity.
5.       Power - It is an exception to the law because when a person acquires power, his lust for power increases. He would want to have more and more of it. However, it violates rationality assumption.
6.       Reading - Since, more reading gives deeper knowledge, a scholar may receive more and more satisfaction, when he reads various books again and again, and therefore Marginal Utility tends to increase. But, here homogeneity and continuity condition's are not satisfied.
7.       Money - It is observed that MU of money never becomes zero. It increases when the stock of money increases. It is because money is a medium of exchange is used to purchase various goods and services to satisfy various wants. Therefore the law is not applicable in case of money. According to some economists however the law is applicable to money.
         All these cases are said to be exceptions of the law. But they are not real exceptions as they violate some of the assumptions. So the law of DMU has universal applicability.

Limitations (criticisms) of the law
1.       Unrealistic assumptions
2.       Cardinal Measurement
3.       Indivisible goods
4.       Constant marginal utility of money
5.       A single want

1.       Unrealistic assumptions – The law of Diminishing Marginal Utility is based upon various assumptions like homogeneity, continuity, constancy, rationality, etc. But in reality, it is difficult to fulfil all these conditions at a time.

2.       Cardinal measurement - The law assumes that utility can be expressed cardinally, i.e., in numbers, so it can be added, compared and presented through schedule. In fact, cardinal measurement of utility is not possible-because it is a psychological concept., but it can be measured ordinally in form, of degree of comparison, i.e., higher or lower level of satisfaction.

3.       Indivisible goods - The law is not applicable to bulky or indivisible goods like T.V, car, house, etc. It is because, normally they are not purchased more than one at a time. So it is impossible to compare the marginal utility derived from various units of such commodities.

4.       Constant marginal utility of money - The law assumes that marginal utility of each unit of money remains constant, however, critics argue that marginal utility of money differs from person to person. It is influenced by changes in prices, stock of money, etc.

5.       A single want - The law is restricted to the satisfaction of a single want only. However, in practice, a man satisfies many wants at a time.

Importance or Significance of the law:-
1.       To the consumer
2.       To the producer
3.       To the monopolist
4.       To the government
5.       To the finance minister
6.       To understand paradox of value

1.       To the consumer - The law of diminishing marginal utility guides the consumer in planning their budget, so as to achieve maximum satisfaction from the resources available.
2.       To the producer - The law is important to the producer in determining price and sales policy. It helps to maximise his profits.
3.       To the monopolist - The law of DMU is helpful to the monopolist to practice price discrimination, i.e., charging different prices to different consumers for the same product.
4.       To the government - The law of diminishing marginal utility is useful to the government to implement various economic policies like public distribution system, social justice, etc. It helps to improve the welfare of the people in the society.
5.       To the finance minister - The law of diminishing marginal utility guides the finance minister to frame progressive taxation policy. It helps to reduce economic inequality. The law is also useful to economic experts, bankers and modern economists.
6.       To understand paradox of value - The law explains 'value paradox' by showing the difference between value in use and value in exchange. Value-in-use refers to usefulness of a commodity. Whereas value-in-exchange means rate. of exchange of one commodity in terms of another.
         Some commodities have high value-in-use but low exchange value, for example water. Whereas some commodities have low value in use but high exchange value due to its scarcity. For example diamonds. Higher TU determines greater value in use and higher MU denotes greater value in exchange. of a commodity.   

2.6.    Law of Equi-marginal Utility

         Introduction

The law of equi-marginal utility is an extension of the law of diminishing marginal utility. It explains consumer equilibrium, when he spends his income on various goods to maximise satisfaction.

The law of equi-marginal utility is also known as the law of maximum satisfaction.

The law of equi-marginal utility is based, upon following assumptions:­

1.       Utility can be measured cardinally.
2.       Consumer's behaviour is rational and he aims at maximum satisfaction.

Equi Marginal Utility Schedule
3.       Income of a consumer is fixed.
4.       A consumer spends his entire income on commodities - A, B & C respectively.
5.       All units of each commodity are homogeneous.
6.       Prices of commodities are constant.
7.       MU of money is, constant.
8.       A consumer knows marginal utility schedule and prices of commodities - A, B & C.

Statement of law
According to Prof. Alfred. Marshall, other things being equal, a consumer will distribute his money income on different goods in such a way that the ratio of marginal utilities and their prices tends'to be equal.

In other words, a consumer gets maximum total utility from spending his income, when the marginal utility derived from the last unit of money, spent on each commodity tends to be equal.

         If a consumer spends his given income on three goods, consumers equilibrium can be presented as follows:       

           Where, MUA, MUB and MUG refer to marginal utility derived from commodities A, B and C, respectively. MUm =marginal utility of money spent.

         It can be explained with the help of the above schedule :

The above given schedule indicates marginal utility derived from commodities A, B, and C. The price of commodity A = Rs. 2/-, commodity B = Rs. 3/- and commodity C = Rs. 4/-.

Let us suppose that, an individual has limited income of Rs. 25/-. A consumer will equate MU of money spent on various commodities with price.

In this case, rational consumers will purchase­-4 units of commodity A
+ 3 units of commodity B
+ 2 units . of commodity C



So he will spend-
Commodity
Units
Price
Amount Spent (Unit X Price)
A
4
2
Rs. 8
B
3
3
Rs. 9
C
2
4
Rs. 8

Total
Rs. 25

According to the law, consumer is in equilibrium when

TU derived = TUA ® 24 + 20+ 16 + 12 = 72
TUB ® 30 + 24 + 18 = 72 units
TUC ® 32 + 24 = 56 units
Total utility 200 units

Thus, a consumer obtains maximum TU from various commodities with limited income of Rs. 25/- No other combination of commodities A, B and C can give him more than 200 units of TU. Hence, the law of equi-marginal utility guides the consumer to get maximum satisfaction from the given income, while arranging his total expenditure. Therefore, the law has great practical significance.

1)      A]      Fill in the blanks with appropriate alternative given in the brackets:
         1.       ....... refers to want satisfying power of a commodity. (Usefulness / Utility / Satisfaction / Happiness)
         2.       Marginal utility diminishes, as consumption of commodity ............ (increases /decreases (remains constant/ becomes zero)
         3.       ........ utility is the utility derived from the last unit of commodity consumed. (Average / Total / Marginal / Zero)
         4.       When MU is ............ TU decreases (positive / negative / zero / high)

         B]      Match the columns:
                  Column "A"                    Column "B"
                  1.  Marginal utility.,           a.  Maximum TU
                  2.  Point of satiety            b.  Assumption of law of DMU
                  3.  Form utility                 c.  Utility from last unit
                  4.  Cardinal                      d.  Exception of law measurement of DMU
                  5. Service utility                e.  Furniture from wood .
                                                         f.   Knowledge by teacher
                                                         g.  Minimum TU

         C]      State the following statements are True or False:
                  1.       Utility depends upon intensity of want.
                  2.       Utility is the basis of demand
                  3.       MU and TU are equal at the initial stage.
               4.       The law of Diminishing Marginal Utility explains economic behaviour of a rational consumer.
                  5.       Negative MU denotes more satisfaction.

2)      A]      Define or explain the following concepts:
         1.       Possession utility
         2.       Knowledge utility                 
         3.       Total utility                 
         4.       Marginal utility

         B]      Give reason or explain:
         1.       Utility is subjective concept.
         2        Utility and happiness are different.
         3.       Utility is ethically neutral.
         4.       Utility is a psychological term.

3)      A]      Distinguish between:
         1.       Utility and usefulness
         2.       Utility and satisfaction
         3.       Total utility and Marginal utility
         4.       Place utility and Time utility

         B]    Write short notes on:
         1.       Equi - Marginal Utility
         2.       Paradox of value
         3.       Form utility

4)      A]      Answer the following questions:
         1.       Explain the relationship between TU and MU.
         2.       What are the characteristics of utility?

B]      State with reason whether you agree or disagree:
         1.       There are no real exceptions to the law of Diminishing, Marginal Utility.    2.      When MU is zero, TU diminishes.
         3.       Law of Diminishing Marginal Utility is important in practice.

5)      Answer in details:
         1.       State and explain the law of Diminishing Marginal Utility. Explain its assumptions.
         2.       State and explain law of Diminishing Marginal Utility and explain its exceptions.

Project:
Prepare a report on - How will you spend a particular amount on various goods to experience the law of equi-marginal utility.




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