Get instant access to notes, practice questions, and more benefits with our mobile app.
Consumer behaviour in micro economics studies how consumers allocate limited income among different goods and services to maximise satisfaction (utility) given prices and preferences.
Utility means the power of a commodity to satisfy a human want. Utility is subjective and differs from person to person and situation to situation.
The law of diminishing marginal utility states that as a consumer consumes more and more units of a commodity, the marginal utility derived from each successive unit goes on diminishing, other things remaining constant.
Access the complete note and unlock all topic-wise content
It's free and takes just 5 seconds
Download this note as PDF at no cost
If any AD appears on download click please wait for 30sec till it gets completed and then close it, you will be redirected to pdf/ppt notes page.
Consumer behaviour in micro economics studies how consumers allocate limited income among different goods and services to maximise satisfaction (utility) given prices and preferences.
Utility means the power of a commodity to satisfy a human want. Utility is subjective and differs from person to person and situation to situation.
The law of diminishing marginal utility states that as a consumer consumes more and more units of a commodity, the marginal utility derived from each successive unit goes on diminishing, other things remaining constant.
Consumer equilibrium means the consumer is getting maximum satisfaction from given income at given prices.
When consumer spends all income on one good, equilibrium occurs where: or in utils per rupee sense.
When consumer buys two or more goods, equilibrium occurs when marginal utility per rupee is equal for all goods: and the consumer spends the whole income.
Meaning: if is greater than , consumer should spend more on X and less on Y until equality is achieved.
An indifference curve (IC) is a curve showing different combinations of two goods that give the consumer the same level of satisfaction. Along the same IC, the consumer is indifferent between combinations.
Budget line shows all combinations of two goods that a consumer can buy with given income and prices.
Budget equation: Slope of budget line:
Consumer equilibrium occurs at the point where the budget line is tangent to the highest possible indifference curve.
Conditions:
From this topic
Total utility is total satisfaction from consuming a given quantity of a good, while marginal utility is additional satisfaction from one more unit. MU is the change in TU when one more unit is consumed. When MU is positive, TU increases; when MU becomes zero, TU is maximum; and when MU is negative, TU starts decreasing. This relationship explains consumer behaviour under diminishing MU.
The law states that marginal utility of successive units of a commodity diminishes as consumption increases, other things constant. It is important because it explains the downward sloping demand curve and forms the basis of consumer equilibrium under utility approach. It also supports the law of equi-marginal utility by showing why consumers reallocate expenditure to equalise marginal utility per rupee.
Utility analysis explains consumer behaviour by assuming that consumers purchase goods to maximise satisfaction (utility) subject to limited income and given prices. Utility is the power of a commodity to satisfy human wants and it is subjective.
Total utility (TU) is the total satisfaction obtained from consuming a certain number of units of a commodity. Marginal utility (MU) is the additional satisfaction obtained from consuming one more unit. MU is the change in TU when consumption increases by one unit. When MU is positive, TU increases; when MU becomes zero, TU is maximum; and when MU becomes negative, TU starts falling.
Law of diminishing marginal utility (DMU): The law states that as a consumer consumes more and more units of a commodity, the marginal utility derived from each successive unit goes on diminishing, other things remaining constant. This happens because the intensity of want decreases with each additional unit.
Importance: DMU explains why demand curve slopes downward and forms the basis of consumer equilibrium and the law of equi-marginal utility. It helps understand why consumers diversify consumption and allocate income among different goods to maximise satisfaction.