C O N S U M E R B E H AV I O U R

TWO APPROACH

Cardinal Approach Ordinal Approach

C O N S U M E R B E H AV I O U R
• The 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).
• UTILITY
Want satisfying power of a commodity
CARDINAL APPROACH

• Alfred Marshall has propounded the cardinal utility theory

• Utility can be measured in terms of money

• A.c. Pigou: “ Money is a measuring rod of utility “
 ASSUMPTIONS TO CARDINAL
APPROACH
1. Measurement of utility can be done in subjective unit called utils
2. Consumer is Rational
It means consumer spend his fix money Income(y) on different commodities in such a way that
he gets maximum satisfaction.
2. U is measurable and can be measured in terms of money
The cardinalist school regards utility as ‘additive’ i.e. separate utility of different goods can be added to obtain the
total sum of the utility of all the goods purchased.
3. Total utility (TU) is the sum of combination of different MU. Marginal Utility
4. Marginal utility is always diminishing
CONTINUE..
5. Marginal utility of money is constant i.e. Worth of money is constant

• Marginal Utility (MU): This is the increase in total utility resulting from the consumption
of each additional unit of a particular good.

• Since MU measures the change in TU, as long as MU is positive at a particular level of

output, TU will be increasing. But if MU becomes negative, TU will decrease.
•
SCHEDULE
Q MU Tu
1 8 8

2 4 12

3 3 15

4 0 15

5 -2 13

MUn = TUn - TUn-1

 L AW O F D I M I N I S H I N G M A R G I N A L
UTILITY

• The greater the level of consumption of a particular good, the less utility consumers derive from
each additional unit of the good.
It is known as the fundamental psychological law.

Assumptions:

• 1) It is assumed that the unit of the consumer good is a standard one.

• 2) It is assumed that utility is measurable and can be expressed in quantitative terms.

• 3) The consumer's tastes and preferences remain same during the period of consumption.

• 4)There must be continuity in the consumption.

• 5) Marginal utility of money remains constant.(MUm)

• 6) Income and prices of the goods remain unchanged during the period of consumption.
D I A G R A M O F M U ( L AW O F
D I M I N I S H I N G M A R G I N A L U T I L I T Y.

Y
8
Point of satiety
Marginal Utility 4
Point of
• 3 Maximum
satisfaction
• 0
Good x
MUx
EXCEP T I ONS TO T HE LAW

1. Gap in consumption of different units

2. Size of the unit are very small
3. Habits
4. Favourite Music
• Total Utility

• As explained in the introduction to this unit, rational consumers wish to maximize their happiness, or utility when buying goods and
services. Otherwise, what is the point of spending money at all? Two concepts that will help us understand HOW consumer maximize
utility, therefore, are:

• Total Utility (TU): This is the total happiness of a consumer at a particular level of consumption. Total utility will generally increase as
total consumption of particular good increases, until the consumer has “had too much” of the good, when total utility will begin to decline.

• TU n = U1 + U2 + U3 +………… Un

•
DIAGRAM OF TU AND MU
P O I N T O F I N F L E C T I O N
R E L AT I O N S H I P B E T W E E N T U
AND MU
1. If MU decreases but positive TU Increases

2. If MU =O Then TU = Maximum[Point of maximum satisfaction ]

3. If MU is negative TU Decrease
• Single commodity Equilibrium

MUx = Mum (4)

Px
Mux= Marginal utility of X
Px= Price of X
Mum= Marginal utility of money or Worth of money
SCHEDULE FOR SINGLE COMMODITY MUM=4
EQUILIBRIUM MUX=MUM4=4
Q Mux (Lays ) Px
1 20 4
2 18 4
3 16 4
4 14 4
5 12 4
6 4 4
7 0 4
8 -4 4
 TWO COMMODITY
EQUILIBRIUM

Mux = Muy

I = Px*Qx + Py*Qy
SECOND LAW OF GOSSENM U M
INCOME=9 PX=1 PY=1
MUM=1
Q MUx MUy MUx/Px MUy/ Py
1 20 (1) 18(1) 20 18
2 16(1) 14 (1) 16
3 12 8
4 4 2
5 2 1
6 0 0
7 -2 -4
8 -6 -8
Q2.)INCOME=60 ( L AY S ) P X = 1 0
PY=5(BISCUIT) I = PX*QX + PY*QY

Q MUx MUy Mux/px MUy/Py

1 100 35 10 7

2 90 30 9 6

3 80 25 8 5

4 70 20 7 4

5 60 15 6 3

6 50 10 5 2

7 45 5 4.5 1
 CONSUMER SURPLUS
• CS = Willing to pay –what does he/she actually pay
• 0 = 400- 400
• The individual get more utility from the consumption of goods than the price
they actually pay for it. The extra satisfaction which they get is consumer
surplus.
• Consumer surplus measures utility which a consumer obtain from the
consumption of a certain amount of commodity in terms of its market value.
D I A G R A M M AT I C R E P R E S E N TAT I O N
OF CONSUMER SURPLUS

X=20
Y=25
Z=15

20
 ORDINAL APPROACH
• The theory was coined by Edgeworth Hicks and Allen
• The concept of ordinal utility is based on the fact that it may not be possible for
consumers to express the utility of a commodity is more or less or equally useful
when compared to another

• For Example
• A consumer may not be able to say after consuming pizza he gets 10 utils and
from burger he gets 5 utils.
But he can give preference/rank which good give more satisfaction .
ASSUMPTIONS TO ORDINAL
APPROACH
1. Rationality:
Implies that a consumer is a rational being and aims at maximizing the total satisfaction given the
income and prices of goods and services.
2. Ordinal Utility:
Assumes that utility is expressible only in ordinal terms. This implies that a consumer is only able
to express his/her preference for goods.
EXAMPLE
• In ordinal utility, the consumer only ranks choices in terms of preference but
we do not give exact numerical figures for utility.
• For example, we prefer a Maruti car to a Nissan car, but we don’t say by how
much.
• It is argued this is more relevant in the real world. When deciding where to go
for lunch, we may just decide I prefer an Italian restaurant to Chinese. We
don’t calculate the exact levels of utility.
CONTINUE.
3. Transitivity and Consistency of Choice:
Implies that consumer choices are assumed to be transitive and consistent. The transitivity of choice
means that if a consumer prefers A to B and B to C, he/she would prefer A to C. On the other hand,
the consistency of choice means that if a consumer prefers A to B in one period, he or she cannot
prefer B to A in another period
4. Non-satiety:
Implies that a consumer is assumed to be non-satisfied. In other words, it is assumed that consumer
does not reach the level of satisfaction by consuming a good and always prefers a large quantity of
goods.
INDIFFERENCE CURVE
• Indifference curve is defined as the locus of points on the graph each representing a different
combination of two substitute goods, which yield the same utility or level of satisfaction to a
consumer. The combinations of goods give equal satisfaction to a consumer.
• Therefore, a consumer is indifferent between any two combinations of two goods when it comes
to making a choice between them. When these combinations are plotted on the graph, the
resulting curve is called indifference curve. This curve is also called as iso-utility curve or equal
utility curve.
F E AT U R E S O F I N D I F F E R E N C E
CURVE
• An indifference curve shows a combination of two goods that give a consumer equal
satisfaction and utility thereby making the consumer indifferent.
• Along the curve the consumer has an equal preference for the combinations of goods shown—
i.e. is indifferent about any combination of goods on the curve.
• Typically, indifference curves are shown convex to the origin, and no two indifference curves
ever intersect.
SCHEDULE OF INDIFFERENCE
CURVE
Good X Good Y Y X MRS /MRTS

1 20 - - -

2 15 5 1 5

3 11 4 1 4

4 8 3 1 3

5 6 2 1 2

6 5 1 1 1
DIAGRAM OF INDIFFERENCE
CURVE