Lecture 3

Theory of Consumer Behaviour

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 Contents

Meaning of Utility
Cardinal and Ordinal Measurement of Utility
Total Utility and Marginal Utility
Utility Schedule
Law of Diminishing Marginal Utility
Indifference Curve
Indifference Curve and Indifference Map
Assumptions of indifference Curve
Properties of Indifference Curve

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 Meaning of Utility

Utility refers to want satisfying power of a

commodity. It is the satisfaction, actual or
expected, derives from the 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.

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 Types of Utility
Cardinal Utility
The cardinal utility approach is propounded by neo-classical economists, who believed
that utility is measureable and the customer can express his satisfaction in quantitative
numbers, such as-1, 2, 3 and so on.

Ordinal Utility
It states that it is not possible for the consumers to express the satisfaction derived from
a commodity in absolute or numerical terms and thus cannot be measured quantitatively.
However a person can express whether a good or service provides more, less or equal
satisfaction when compared to one another. In this way measurement of utility is ordinal
i.e. qualitative. Ex- Ranking preferences for commodities.

For example: A person prefers tea to coffee and coffee to milk. He can tell his
preferences like tea>coffee>milk.

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Cardinal verses Ordinal Utility

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 Total Utility
Total utility refers to the level of total satisfaction from consumption of all possible units
of a commodity.

For example first unit of an item (ex-ice cream) of consumption gives someone satisfaction
of 20 utils, second unit gives 16 utils and third unit gives 10 utils then total utility TU
gained from consumption of three units is = 20+16+10=46 utils.

Symbolically total utility can be expressed as:

TUn = U1+U2+U3+………..+Un

U1, U2,U3,……….Un= Utility from the 1st, 2nd, 3rd and nth unit
TUn = Total utility obtained from consumption of n units of given commodity
N= number of unit consumed

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 Marginal Utility
Marginal utility indicates additional utility derived from consumption of one more
unit of a given commodity/goods. It is the utility derived from the last unit of
commodity purchased.

As per given example when the third ice-cream is consumed, TU increases from 36
utils to 46 utils. Additional 10 utils from the third ice cream is the MU.

MU can be calculated as MUn=TUn-TUn-1

Where, MUn=Marginal Utility from nth unit; TUn=Total Utility from n units.
TUn-1=Total Utility from n-1; n=Number of units of consumption

Another way of calculating MU is the change in TU when one more unit is

consumed. However, when change in units consumed is more than one, then MU can
also be calculated as:
MU=Change in total utility/Change in numbers of unit=∆TU/ ∆ Q
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 Utility Schedule

No. of Apple Total Utility Marginal Utility

1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

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 Law of Diminishing Marginal Utility

Law of Diminishing marginal utility means that though with increase in consumption
units total utility increases but it increases at a decreasing rate. 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.

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 Indifference Curve Analysis

An indifference curve is a locus of all combinations of two goods which yield same level
of satisfaction (utility) to a consumer. Since any combination of the goods on an
indifference curve gives equal level of satisfaction the consumer is indifferent to any
combination he consumes. Thus an indifference curve is also known as equal satisfaction
curve or iso-utility curve.

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 Properties of Indifference Curve

Consumer has fixed amount of money all of which is to be spent only on two goods
Prices of both commodities are constant
Consumers always tends to move higher IC curve
Utility is a psychological phenomenon and thus it is unquantifiable. Consumer can
express utility in rank terms.
Law of Diminishing rate of substitution
Consumer always behaves in a rational manner

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Pears Oranges
30 6
24 7
20 8
14 10
10 13
8 15
6 20

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 Properties of Indifference Curve
Indifference Curve slopes downwards to right
An indifference curve can neither be horizontal line nor a vertical line nor an upward
sloping curve. When a consumer wants to have more of a commodity, he or she have to
give up some of the other commodity, given that the consumer remains on the same level
of utility at constant income. As a result IC curve downward from left to right.

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 Properties of Indifference Curve
IC is convex to the origin
An IC can neither be concave to the origin nor can be a downward slopping straight line.
The curve allows the substitution among two commodities in any combination. As
consumption of one good over another gains less utility, the marginal rate of substitution
between two goods diminishes. It is visible as a consumer moves along the curve to the
right. Hence, it is strictly convex.

Higher IC shows higher level of satisfaction

Any combination of two goods on the higher curve
give higher level of satisfaction to the consumer
than the combination of goods on a lower curve.

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 Properties of Indifference Curve

Two IC never intersects

Each IC is representation of a particular
level of satisfaction of the consumer; which
remains same throughout the curve for
different combinations of the two goods.
Thus, IC cannot intersect each other.

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 Consumer Equilibrium
The term consumer’s equilibrium refers to the amount of goods and services which the
consumer may buy in the market given his income and given prices of goods in the market.

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Any Questions?

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