Theory of Consumer Behaviour

Assumption of Rationality
Assumption of rationality is the point of departure in the theory of the consumer’s beahviour.
Rationality in this case means optimization. According to this postulate, the consumer is
assumed to choose among the available alternatives in such a manner that the satisfaction
derived from consuming commodities is as large as possible. This implies that he is aware of
the alternatives facing him and is capable of evaluating them. Principle assumption upon
which the theory of consumer behavior and demand is built is: a consumer attempts to
allocate his/her limited money income among available goods and services so as to maximize
his/her utility (satisfaction).

Meaning of Utility
Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or
expected, derived from consumption of a commodity. In the words of Hobson, ‘Utility is the
ability of a good to satisfy a want’. In short, when a commodity is capable of satisfying
human wants, it can be said that the commodity has utility.

Cardinal and Ordinal Measurement of Utility

Classical economists, such as W. Stanley Jevons, Leon Walras and Alfred Marshall assumed
that utility is measurable in the same way, as weight or height is measured; and hence,
assumed that utility can be measured in numerical terms. It implies that consumers are

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assumed to be capable of assigning to every commodity or combination of commodities a
numerical number representing amount of utility associated with it. These numbers used to
denote utility were supposed not to show only level of satisfaction; but, also are comparable
with each other. In absence of any standard unit for measuring utility; economists used an
imaginary and psychological measurement unit known as ‘util’.

Economists following the lead of J. R. Hicks, Slutsky and Vilfredo Pareto believe that utility
is measurable in an ordinal sense. In case of ordinal measurement also, utility is measured in
or expressed by numerical numbers. But, contrary to cardinal measurement of utility, in case
of ordinal measurement of utility, these numbers merely show the rank of satisfaction or
preference order. Moreover, these numbers are in no way comparable. Difference between
the two types of measurement can be clarified with the help of information placed in
following table.
Table 1: Measurement of Utility
Unit of Commodity Consumed Utility Obtained
1 8
2 4

If, cardinal measurement of utility is applied, then it implies that utility got from consumption
of first unit of the commodity is not only greater than that got from consumption of second
unit; but also that, utility got in first instance is double than that got in second case.
Conversely, if, ordinal measurement of utility is applied, then it only implies that utility got
from consumption of first unit of the commodity is greater than that got from consumption of
second unit. That is, while under cardinal measurement, numerical figures used to express
utility level, show both order of utility obtained and their degree of difference; under ordinal
measurement, same figures used to express utility level, show only order of preference.

Total Utility and Marginal Utility

Total utility refers to level of total satisfaction obtained from consumption of all possible
units of a commodity. In other words, it is summation of marginal utilities got from
consuming individual units of the commodity. Where, marginal utility is additional utility
derived from consumption of one more unit of a given commodity.

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Say, for example, first unit of an item of consumption gives someone satisfaction of 20 utils,
second unit gives 16 utils, and, third unit gives 14 utils; then total utility (TU) gained from
consumption of these three units is = 20 + 16 + 14 = 50 utils. Here, figures 20, 16, and 14 are
nothing but marginal utilities obtained from first, second and third unit of consumption.
According to this example, when second unit of the commodity is consumed, TU increases
from 20 utils to 36 utils; implying that marginal utility of second unit is 16 utils. In the words
of Chapman, ‘Marginal utility is addition made to total utility by consuming one more unit of
a commodity.’ Symbolically, total utility can be expressed as:
TUn = MU1 + MU2 + MU3 +……… + MUn = ΣMUi
Where, TUn = Total utility obtained from consumption of ‘n’ units of a given commodity;
n = Number of units consumed;
MUi = Marginal utility obtained from consumption of ith unit (i = (1, 2, 3, ………………..n)
Similarly, marginal utility (MU) can be expressed as: MUn = TUn – TUn-1
Where, MUn = Marginal utility obtained from consumption of nth unit;
TUn = Total utility obtained from consumption of ‘n’ units;
TUn-1 = Total utility obtained from consumption of (n – 1) units;
∆TU Change in total utility
Alternatively marginal utility can also be expressed as MU = = .
∆Q Change in number of units

Utility Schedule
Utility schedule below depicts that, as number of consumption of units of orange increases,
total utility obtained from orange consumption also increases; but marginal utility decreases
when the number of consumption unit increases.

Table 2: Utility Schedule

Unit of Orange
(Consumed per day) Total Utility (util) Marginal utility (util)
1 12 12
2 22 10
3 30 8
4 36 6
5 40 4
6 42 2
7 42 0
8 40 –2

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As per above information, when the individual consumes seven units of orange, then total
utility is highest (42) and marginal utility becomes zero. Further increase in consumption
leads to fall in total utility; and, consequently, marginal utility becomes negative.

Law of Diminishing Marginal Utility

Law of diminishing marginal utility implies that though with increase in consumption units,
total utility increases but it increases at a decreasing rate. According to the law of diminishing
marginal utility, marginal utility of a good diminishes as an individual consumes more units
of a good. In other words, as a consumer takes more units of a good, extra utility or
satisfaction that he derives from an extra unit of the good goes on falling. Marshall, the
famous exponent of marginal utility analysis, stated law of diminishing marginal utility as
follows: ‘The additional benefit which a person derives from a given increase of his stock of
a thing diminishes with every increase in the stock that he already has.’ This law is based
upon two important facts. Firstly, while the total wants of a man are virtually unlimited, each
single want is satiable. Therefore, as an individual consumes more and more units of a good,
intensity of his want for that good goes on falling and ultimately a point is reached where the
individual no longer wants any more units of that good. That is, when saturation point is
reached, total utility is highest and marginal utility is zero; and, any further increment in
consumption will give negative marginal utility.

Figure 1: Total Utility Curve

TU
44
40
36
32 TU
28
24
20
16
12
8
4
0 1 2 3 4 5 6 7 8 Unit of consumption

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 Figure 2: Marginal Utility Curve

MU
12
10
8
6
4
2
0 1 2 3 4 5 6 7 8 Unit of consumption
‒2 MU

Assumptions behind Law of Diminishing Marginal Utility

Law of diminishing marginal utility is a universal law that holds true almost in all cases of
physiological and social wants. But, the law holds under certain assumptions. Foremost
important assumption made is that, the consumer is rational in measuring, calculating and
comparing utilities of different units of a commodity and aims at maximizing total
satisfaction. Along with this assumed that, there is no change in taste, habit, custom, fashion
and income of the consumer.

Utility is to be measurable such that the consumer can express his satisfaction in numerical
figures representing monetary value. When a consumer spends money on a commodity, he is
left with lesser money to spend on other commodities. In this sense, remaining money
becomes dearer to the consumer and it increases marginal utility of money for the consumer.
As marginal utility of a commodity has to be measured in monetary terms; it is assumed that
marginal utility of money remains constant. Side by side, it is assumed that prices of different
units and of substitutes of the commodity remain the same.

Regarding type of good, condition is that, it should be of an ordinary type. If commodities are
like, diamonds and jewels, or hobby goods like stamps, coins or paintings, the law does not
apply. In that case, utility of the additional piece of coin or jewel may be greater than the
earlier ones. But this view is not universally correct; as, the law also applies in these cases.
Collector of these items is not likely to have innumerable pieces of coins or jewels.

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There is to be a single commodity under concern with homogeneous units; that is, all units of
the commodity should be of same weight and quality. If, for example, first apple is sour and
the second one sweet, the second will give greater satisfaction than the first. Units of the
commodity should also be of suitable size. For example, if a thirsty person is given water in a
spoon, then every additional spoon of water will yield him more utility. Also assumed that,
all the commodities consumed by a consumer are independent; which means that marginal
utility of one commodity has no relation with marginal utility of another commodity. Further,
it is also assumed that one person’s utility is not affected by the utility of any other person.
There should be continuity in the consumption of the commodity. Units of the commodity
should be consumed in succession at one particular time. For example, if one ice-cream is
consumed in the morning and another in the evening, then the second ice-cream may provide
equal or higher satisfaction as compared to the first one.