Theory of consumer behavior
Introduction. Each consumer has to face the problem of
unlimited wants and limited sources. In such state of affairs it is the desire
of each consumer to maximize his satisfaction in the presence of income
constraint. Whenever a consumer maximizes his satisfaction, he is said to be in
equilibrium. We have basically two main approaches to describe the consumer’s
equilibrium:
1.
The
cardinal approach
2.
The
ordinal approach
The cardinal or classical or utility approach
This model of consumer behavior got the popularity in 1870 by
William Stanley of great Britan. We have two laws to explain consumer’s
equilibrium by
Cardinal approach.
I. I. Law of diminishing marginal utility
II.
Law
of equal marginal utility
Law of diminishing marginal utility
Before we explain this law, we clarify the meaning utility, total
and marginal utility
Utility)i) .anything
which reduced pain and increases pleasure has utility.
--------ii). The
power of a good to satisfy human wants.
Example. Water has power to quench one,s thirst.
According the classical economist U=f (Q)
Moreover utility can measure into number like 1, 2, and 3,
(cardinaly). They use util, just like
unit in electeriy is used.
Total utility. Utility
gained by the use of total quantity is said to be total utility.
TU=f (Q) (total utility depend upon total quantity)
Marginal
utility . by “marginal
utility mean the net change in total utility by using an additional unit of
commodity” MU= du/dq
After this, we now introduce the law
of diminishing marginal utility.
Law of diminishing marginal utility. “The more we have of any commodity or with the continuous
use of any commodity; the derived marginal utility goes to
fall---------------------- (if other things remain the same)
In this phenomenon is presented with
the help of schedule and diagram. We have utility function U= 11Q---Q2 by
assuming different value of “Q” values of TU and MU will be attained as
follows.
|
Q |
U |
MU = dU/dQ |
|
|
1 dQ = 1 2
3
4
5
6
7 |
10 dU= 8 18
24
28
30
30
28 |
10 8
6 4
2
0
-2 |
MU falls But it is +ve
TU maxi MU=0
TU falls MU= -ve |
From the schedule and diagram we
deduce the following:,
1) In the beginning TU increases but at the decreasing rate, hence MU
decrease, but still +ve.
2) When TU is maximum MU= zero.
This situation is known as saturation point .
3) When TU fall -----------MU = negative –ve
Assumption. The law of DMU will
hold true in the presence of the following assumption
1) Continues use of commodity. If there is long
interval between the consumption of the same two units then law will not be
applicable.
2) Unit of commodity must be similar. For example if
first mango is not better and second is better, then according to the law
utility will not decrease.
3) Reasonable units.
If units are so small or too large, this law will not operate its
function.
4) The consumer
taste should remain the same. If
a consumer has been told that apple is tonic for his health, then marginal
utility will increase instead of falling.
5) No change
in income. If the income
of a people changes then, this law may not be operated.
6) No change in fashion. If there is sudden change in fashion, the law
may not be operates.
Limitations of
the law.
1. In real world it is difficult to
measure utility in figure, beoz no consumer has any type of Utilometer which
could represent satisfaction in util.
2. The comparison of prices and MU
is very difficult.
3. Now a day the purchases are
mostly made on the basis of fashion, tradition. But in the utility approach, we
do not find glimpses of the above said factor.
4. In daily life consumer purchases “consumer durable” like TV, car
etc, their MU cannot ascertained, then how a comparison could be made between
MU and prices.
5. Utility of money not remain the same becoz when prices falls,
the MU of money will rise.