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SS2: ECONOMICS - 2ND TERM

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Concept of Consumer Theory

Consumer behaviour is an aspect of economic analysis in which the consumer’s rational decision on income, distribution, and satisfaction is determined. 

Basic concept of Utility

Utility is the amount of satisfaction obtained by a consumer from the consumption of goods at any given time without any reference of its usefulness.  Utility is the power of a commodity to satisfy wants. We will introduce the integral concepts of utility, namely total utility, marginal utility, and average utility.

Let us deal with each of these one by one.

1. Total Utility:

Total utility means the total amount of satisfaction derived by the consumer from the consumption of commodities at different units. It is assumed that the more a commodity a consumer consumes the more satisfaction that is derived.

Total Utility Curve

Screen Shot 2020 12 30 at 5.52.59 PM

2. Average Utility:

This is the amount of satisfaction a consumer derives from (per unit) commodity consumed. It is obtained by dividing total utility by the number of units of the commodity consumed. 

 AU = \( \frac{TU}{Q} \)                       

Average Utility Curve

Screen Shot 2020 12 30 at 5.59.43 PM

3. Marginal Utility:

Marginal utility is the change in the total utility from a unit change in the consumption of a commodity. It means the additional amount of satisfaction which a consumer derives from the consumption of extra units of a commodity.

It is given as :  

 MU = \( \frac{\Delta TU}{\Delta Q} \)

where \( \scriptsize \Delta TU \) = Change in Total Utility

\( \scriptsize \Delta Q \) = Change in Units of Commodity Consumed

Marginal Utility Curve

Screen Shot 2020 12 30 at 6.02.43 PM

Types of Utility

1. Form utility: This involves changing the structure of the commodity e.g Flour to bread 

2. Time Utility: It involves storing in order to derive satisfaction overtime.

3. Place Utility: It involves changing the situation of a commodity through distribution e.g transportation of farm input to the market.

The Law of Diminishing Marginal Utility

The law of diminishing marginal utility states that as successive units of a commodity are consumed, total utility increases but at a slower rate. In other words, an additional satisfaction a consumer derives from consuming a commodity diminishes as additional units of the commodity are consumed.  That is as an extra unit of a given commodity is consumed, the additional satisfaction derived decreases which the marginal utility of the commodity tends to decrease as more and more of that particular commodity is consumed at a particular time, while the consumption of other commodities is held constant. Each additional unit brings less extra utility than the proceeding one until the last brings zero utility. Beyond this point additional unit is consumed brings negative utility (disutility).

The relationship between Total Utility and Marginal Utility

This curve is downward sloping meaning that each additional units of consumption adds less and less to TU until the last unit adds nothing.

Unit of commodityTotal utilityMarginal utilityAverage utility
166
21155.5
31545
41834.5
52024
62113.5
72103
820-12.5

Although total utility increases with consumption, the table shows it rises at a decreasing rate. This means that utility decreases as more units of a commodity are consumed.

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