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Consumer Behavior

Utility Analysis

In simple terms, utility can be defined as the total satisfaction that a consumer derives by consuming a good or service. As utility is a subjective concept, so it quite is difficult to measure it directly. Moreover, it can be estimated indirectly by the price one is willing to pay for a specific good.

Total Utility

Total utility is defined as the total amount of utility which a person obtains by consuming all the units of product available at disposal.

TUn = ∑x

Where,

TUn = Total utility of units.

∑x = Total utility derived from the consumption of units.

Marginal Utility

Marginal Utility implies the extra satisfaction that a consumer obtains from purchasing an additional unit of a particular commodity.

MUn = TUn – TU(n -1)th term

Where,

MUn = Marginal utility of nth term

TUn = Total utility of units.

TU(n -1)th term = Total utility of (n-1)th term.



The law of Diminishing Marginal Utility

According to the Law of Diminishing Marginal Utility, the more we have of a certain commodity, the marginal utility from the additional units goes on decreasing i.e. less he wants more of it. In other words, if the consumer increases consumption of a particular commodity with consumption of other remaining same as before then the marginal utility of that particular good falls. The table below highlights the relation between total utility and marginal utility.



Assumptions of the Law

• All the units of the commodity consumed are homogenous.

• The taste of consumer remains same throughout the operation of the law.

• The process of consumption should be continuous without ant time gap.

• The units of commodity consumed should not be very small in size i.e. they should be of average size and quantity.

Law of Equi-marginal Utility

The Law of Equi-Marginal Utility is an addition to the law of diminishing marginal utility. The concept of equi-marginal utility highlights the conduct of a buyer in allocated his limited income between several goods and services. In other words, the law states that a balanced buyer will always strive to maximize his/her contentment by purchasing combination of two or more goods which provide him/her maximum marginal utility per dollar for each good, till the point the budget is completely used. Further, a customer is said to be in equilibrium when he/she allocates his/her provided income between several goods in such a manner that marginal utility obtained from the last rupee spent on each good is equal.

The consumer is said to be in equilibrium when,

Where,

MU = Marginal Utilty

P= Price

In any case when the Marginal Utilities of the goods are not same, the buyer will buy a combination that will offer him/her highest level of Marginal Utility per dollar value of each good, in such a manner that the complete budget amount is utilized.