Consumer Behavior

The Theory of Consumer Behavior, like the Law of Demand, can be explained by the Law of Diminishing Marginal Utility. Consumer Behavior is how consumers allocate their money incomes among goods and services.

Utility
The goods satisfy human wants. This want satisfying quality in a good is called Utility.

Types of Utility:
Form Utility: Due to change in form there is change in utility, e.g. Wood when transformed into furniture, utility will increase. Place utility: When goods transported from one place to another place utility can increase. For example apple will fetch more prices in other part of country than in Kashmir and Himachal Pradesh. Time utility: By storing a commodity and selling it at a time of scarcity, utility can be realized more.

Cardinal approach- 0, 1, 2, 3 Ordinal approach- I, II,III, IV

Concepts
Utils - imaginary unit of measurement for utility

Total Utility: TU the total amount of satisfaction or pleasure a person derives from consuming some specific quantity. Total Utility is equal to all of the marginal utilities added together. Marginal Utility: the extra satisfaction a consumer realizes from an additional unit of that product. Consumers want to maximize the total utility not marginal utility.

Law of Diminishing Marginal Utility

Definition: Consumers will buy as much as pleases them, with their income. As each additional unit is purchased, the excess satisfaction gained from each purchase decreases, until it becomes irrational to continue purchasing. For example, one slice of pizza may give you much satisfaction, as does the second slice. The third slice makes you extremely full, while the fourth slice makes you nauseous. At this point, it becomes irrational for you to purchase additional slices of pizza.

Assumptions
The utility analysis is based on the cardinal concept which assumes that utility is measurable and additive like weights and lengths of goods Utility is measurable in terms of money The marginal utility of money is assumed to be constant

 The consumer is rational who measures , calculates , chooses and compares the utilities of different units of the various commodities and aims at maximization of utility He has the full knowledge of the availability of commodities and their qualities He possesses perfect knowledge of the choices of commodities open to him and his choices are certain He knows the exact prices of various commodities and their utilities are not influenced by variations in their prices There are no substitutes

Limitations
There should be a single commodity with homogeneous units wanted by an individual consumer. All units of the commodity should be of the same weight and quality. For example, the first apple is sour and the second sweet, the second will give greater satisfaction than the first

 There should be no change in the tastes, habits, customs, fashions and income of the consumer. A change in any of them will increase rather than diminish utility. There should be continuity in the consumption of the commodity. Units of the commodity should be consumed in succession at one particular time. Pieces of bread taken at random may increase the utility

 Units of the commodity should be of a suitable size. Giving water to a thirsty person by spoons will increase utility of the subsequent spoons of water.

Importance of the law

The change in design, pattern and packing of commodities very often brought about by producers is in keeping with this law. The principles of progression in taxation is also based on this law.