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The Consumer
The Consumer
A consumer = An individual who makes the decision whether to buy goods/services.

Utility = The amount of benefit/satisfaction received from the consumption of a

good/service.

Assumptions concerning consumer behaviour:

1. Consumers have limited resources ie. There needs and wants are greater than their income.
2. Consumers seek to get maximum utility/satisfaction when buying goods.
3. Consumers will act rationally ie. If they see two identical goods in two different shops, they will buy the
cheaper of the two goods.
4. They are subject to the Law of Diminishing Marginal Utility.

What is an Economic Good?

An economic good is a product/service which has the following characteristics:

It must Commands a price – Supply must be scarce in relation to demand. Ie Air isn't an economic good.
Must provide utility – The good must provide the consumer with a sense of satisfaction. Ie. Weeds in a
garden aren't an economic good.
Must be transferable – Ownership or benefit of the good must be able to be given from one person to
another. Eg. Talent in singing isn't an Economic good.

Utility: (Unit = Utils)

Total Utility = The total satisfaction a person gets from consuming all the units of a particular good.

Marginal Utility (MU) = The extra satisfaction/utility gotten from consuming an extra unit of the good. Eg. If
you receive 20 utils from one glass of water and 35 utils from a second glass, then the MU of the second
glass is 12 utils.

The Law of Diminishing Marginal Utility: (LDMU)

Def: States that as more and more units of a good are consumed, a point will be reached
where the MU received from each good will eventually begin to decline/diminish.

Eg. If you eat 10 mars bars, the first one will be much more enjoyable than the last one. After 2 or 3 bars
the MU will decline.

Assumptions of the LDMU:

Income remains the same: If income rises or falls it may effect someones MU as they may spend their
incomes in different ways.
Time factor: There must be no large gaps between the time in which the goods where consumed. Eg. If
you eat 4 cakes in a month the MU may not decline, but if you eat them in an hour it would.
Addictive goods/medicines are an exception: As someone consumes more units of alcohol, drugs etc.
the utility may increase as they become addicted.
It only applied after a certain amount called 'The origin' has been consumed: The origin is the minimum
quantity of a good that must be consumed and the Mu will begin to diminish only when this stage has
been reached. Eg. A full orange must be consumed for utility to decline, not just a segment or two.
Commodities that don't comply with the LDMU:

Medicine – Every dose may be important as the first one.

Addictive goods – Each extra unit consumed can increase the MU.
Goods/services you develop a taste for – With these commodities the MU increases as you begin to
perform better. Eg. Gym sessions or healthy eating.

The Law of Equi Marginal Returns ** :**

Def : States that if a consumer wants to receive maximum satisfaction he must spend his
income in such a way that the ratio of MU to price is the same for all goods he buys.

When consumers follow this law they are in equilibrium.

Eg. 2005 Question 4 (Short question)

A consumer in equilibrium buys 10 cups of coffee at €2 each and 10 phone cards at €6 each. The marginal
utility of the cups of coffee is 5 utils. What is the marginal utility of phone cards? Show your workings.

Key Terms
Economic Good = A product/service which commands a price, derives utility and is transferable.

Marginal Utility (MU) = The extra satisfaction/utility gotten from consuming an extra unit of the good

The Law of Diminishing Marginal Utility (LDMU) states that as more and more units of a good are
consumed, a point will be reached where the MU received from each good will eventually begin to
decline/diminish.

The Law of Equi Marginal Returns States that if a consumer wants to receive maximum satisfaction he
must spend his income in such a way that the ratio of MU to price is the same for all goods he buys.