THE THEORY OF CONSUMPTION AND PRODUCTION BEHAVIOR
A: THE THEORY OF CONSUMPTION
This theory explains how consumers spend their incomes to maximize their satisfaction. It shows how
choices are influenced by the :-
Price of commodities
Income and
Preferences
It can be used to explain and predict outcomes of economic policies influencing prices and incomes. The
theory can be extended to choices regarding non market and market activities. Theory can also help in
explaining how economic considerations influence decision of many to have children and allow time for
leisure and work.
B: PREFERENCES AND CHOICES
Person differs widely in their preferences; one persons pleasure is anothers pain. The way people rank
available alternatives provides information about likes and dislikes; this is because it indicates what
alternatives are preferred and how the customer would choose among them.
Preferences are represented by the rankings consumers give to alternatives opportunities. Preferences
are but one determinant of choices, choices of the quantities of each good to consumer also depend
on:-
The prices of items desired
The income a person has available to spend
There is a strictly difference between preference and choice, preference are likes and dislikes, where as
a choice is what have been selected to have base on prices on items and income available to sacrifice
(spend).
Budget does depend on income and prices of goods and services desired. Consumers have to choose
how to best satisfy their preferences without spending more than what their budget permit.
C: ASSUMPTIONS ABOUT CONSUMER PREFERENCE
The economists model of consumer choice is based on a few underlying assumptions about individual
preferences for goods and services. These includes:-
Ability to rank alternatives
It must be assumed that persons can rank alternative combinations of goods in an
order that reflects their preferences. How a person rank alternative combinations of
goods do give the preferences of that choices.
Preferences are transitive ( it takes direct objective)
By a transitive imply that, if a person prefers a basket of goods A to the basket B, and
also prefer B to C. This is because it can be inferred from those rankings that A
provides more satisfaction than B. Similarly, B gives more satisfaction to C. It must
follow that, alternative A definitely provides more satisfaction than C, because A
would be chosen over B.
More of goods are preferred to less
It usually assumed that people always prefer more of a good or services to less of it.
This imply that, consumer have insatiable desires for economic goods.
NB:
Non market activities are all those whose costs are not financed from the sale of a good or services in
the market, for example home food preparation.
D: UTILITY
This refers to as the satisfaction that consumers obtain from consuming goods and services or engaging
in an activity, i.e. amount of satisfaction that a consumer obtain when consuming goods or services.
E: TOTAL UTILITY
This is a total satisfaction gained from consuming goods and services. Total utility depends on the
quantities of the commodities consumed, i.e. the greater the amount/ quantities of commodities
available for consuming, the greater the total utility will be and vice versa.
F: MARGINAL UTILITY (Mu)
This refer to the amount of satisfaction to be derived from extra unit of a commodity consumed, i.e.
addition satisfaction that a consumer get once consuming addition unit of commodity. It is given by:-
Mux = Change in Total utility
Change in quantity of x
NB:
There is inversely relationship between total utility and marginal utility, the greater the quantities of
commodities consumed, the greater the total utility but the less the marginal utility will be and vice
versa. As more quantities of commodities consumed, total utility tends to increase, but each marginal/
extra unit of commodity consumed results a fall in marginal utility.
