Theory of consumer’s behavior

It is the desire of each consumer to maximize his

satisfaction in the presence of income.
To describe consumer’s equilibrium we have basically
two main approaches.
1. The Cardinal Approach
2. The Ordinal Approach
The Cardinal Utility Approach
Basic Assumptions
1. The satisfaction or utility can be measured into
numbers.
2. Utility depends upon the units of one good which a
consumer is consuming.
3. The behavior of all the consumers remains alike.
4. Consumer is rational i.e, he is well aware of with his
income and prices of the goods in the market.
5. The money is a measure which is employed to measure
the utility of the goods and services and there is no
change in marginal (extra) utility of the money.
Law of Diminishing Marginal Utility
(DMU)
Important concepts :
Utility:
The power of a good to satisfy human want. U = f (X)
Total Utility:
Total utility is the utility achieved from the consumption of all units of a
commodity.
Marginal Utility:
Marginal Utility (MU) mean the net change in total utility by having
consumed an additional unit of a commodity. MU function is a decreasing
function.
Saturation Point:
It is a point or a situation at which marginal utility drops down to zero and
total utility is at maximum level.
MU = 0 and TU= maximum & constant
Diminishing Marginal Utility (DMU)
1. The more we have of any commodity, the desire to get any more
of it decreases.
Technically this law is stated as “ When a consumer goes on to use
the units of a good, the total utility derived from the units of the
good increases at a decreasing rate”.
2. The additional benefit, which a person derives from an increase in
his stock of a thing, diminishes with every increase in the stock
that he already has.
Important points
3. Along with increase in use of any commodity, TU increases at a
decreasing rate, hence MU decreases.
4. When total utility reaches maximum, MU become zero. This
situation is called point of saturation.
5. When total utility itself falls, MU become negative.
Assumptions of the law of DMU
1. There should be a continues use of the
commodity which a consumer is consuming.
2. It is assumed that MU tends to diminish.
3. Single commodity is consumed in this law.
4. All the units of the commodity in use must be
similar.
5. The unit of good must be of a suitable amount.
6. The taste of consumer should remain the same.
7. The income of the consumer should not
change.