UNIT-2: Consumer Behavior
and Demand Analysis
Cardinal Utility Approach
In this approach, utility is measurable in exact units, known as "utils" (a
hypothetical unit of satisfaction). For example, if eating one apple gives you
10 utils of satisfaction and eating a sandwich gives you 20 utils, the
sandwich gives you twice as much satisfaction as the apple. The theory
assumes that people aim to maximize their utility when making
consumption decisions.
People have limited money, so they want to spend it in a way that gives
them the most satisfaction. This is called utility maximization.
Let’s say you have $10 to spend, and you’re choosing between apples and
oranges. You assign utility values to them:
1 apple gives you 40 utils of satisfaction.
1 orange gives you 60 utils of satisfaction.
If apples cost $2 each and oranges cost $3 each, you compare the utils per
dollar:
Both give the same satisfaction per dollar, so you might spend your money on
an equal number of apples and oranges.
Law of Diminishing Marginal Utility
A fundamental concept in economics that explains how the additional
satisfaction (or utility) you get from consuming more units of a good or
service decreases as you consume more of it. In simple terms, the more
you have of something, the less you enjoy each additional unit.
UNIT-2: Consumer Behavior and Demand Analysis 1
, Example; Imagine you're really hungry, and you start eating slices of pizza:
First Slice: The first slice gives you a lot of satisfaction because you're very
hungry. Let's say it gives you 50 utils (a unit of satisfaction).
Second Slice: You’re still hungry, but not as much as before. The second slice
gives you less satisfaction, say 30 utils.
Third Slice: Now you're starting to feel full. The third slice might only give you
10 utils.
Fourth Slice: By this point, you’re full, and the fourth slice might give you no
satisfaction or even make you feel uncomfortable. It could have 0 utils or even
negative satisfaction (e.g., -10 utils).
As you keep consuming more slices, each one adds less and less to your total
satisfaction. Eventually, the marginal utility (extra satisfaction from each
additional slice) drops to zero or becomes negative.
Marginal Utility: The satisfaction you get from consuming one extra unit of a
good.
Example: The marginal utility of the second slice of pizza is 30 utils, while
the first slice gave 50 utils.
Total Utility: The total satisfaction from all the slices you’ve consumed.
Example: After 3 slices, the total utility is 50+30+10=90 utils.
Diminishing Marginal Utility: As you consume more of a good, the
satisfaction (marginal utility) from each additional unit decreases.
Example: The satisfaction from the first slice is much higher than the third
or fourth slice.
This happens because of saturation. The first unit of a good or service
satisfies a significant need or desire, but each additional unit provides less
satisfaction. After a point, consuming more doesn’t add any value, and it
might even make things worse (like overeating).
The graph above illustrates the Law of Diminishing Marginal Utility. It shows
how the marginal utility (additional satisfaction) decreases as more slices of
pizza are consumed.
Explanation:
X-axis: Number of slices consumed.
Y-axis: Marginal utility (measured in utils, units of satisfaction).
First slice: Provides the highest satisfaction (50 utils).
UNIT-2: Consumer Behavior and Demand Analysis 2
, Second slice: Still enjoyable but provides less satisfaction (30 utils).
Third slice: Satisfaction decreases further (15 utils).
Fourth slice: Minimal satisfaction (5 utils).
Fifth slice: No additional satisfaction (0 utils).
Sixth slice: Consuming more starts to reduce satisfaction, becoming negative
(-10 utils), as you feel overly full.
This declining pattern is the essence of the law—additional units bring less
satisfaction, and at some point, they may even bring dissatisfaction.
Implications of the Law of Diminishing Marginal Utility
Consumer Choices: People allocate their resources to maximize
satisfaction. This law explains why consumers diversify their purchases
instead of buying large quantities of a single item. Pricing Strategy:
Businesses might lower prices for additional units to entice consumers,
knowing that each extra unit is less valuable to them.
UNIT-2: Consumer Behavior and Demand Analysis 3
and Demand Analysis
Cardinal Utility Approach
In this approach, utility is measurable in exact units, known as "utils" (a
hypothetical unit of satisfaction). For example, if eating one apple gives you
10 utils of satisfaction and eating a sandwich gives you 20 utils, the
sandwich gives you twice as much satisfaction as the apple. The theory
assumes that people aim to maximize their utility when making
consumption decisions.
People have limited money, so they want to spend it in a way that gives
them the most satisfaction. This is called utility maximization.
Let’s say you have $10 to spend, and you’re choosing between apples and
oranges. You assign utility values to them:
1 apple gives you 40 utils of satisfaction.
1 orange gives you 60 utils of satisfaction.
If apples cost $2 each and oranges cost $3 each, you compare the utils per
dollar:
Both give the same satisfaction per dollar, so you might spend your money on
an equal number of apples and oranges.
Law of Diminishing Marginal Utility
A fundamental concept in economics that explains how the additional
satisfaction (or utility) you get from consuming more units of a good or
service decreases as you consume more of it. In simple terms, the more
you have of something, the less you enjoy each additional unit.
UNIT-2: Consumer Behavior and Demand Analysis 1
, Example; Imagine you're really hungry, and you start eating slices of pizza:
First Slice: The first slice gives you a lot of satisfaction because you're very
hungry. Let's say it gives you 50 utils (a unit of satisfaction).
Second Slice: You’re still hungry, but not as much as before. The second slice
gives you less satisfaction, say 30 utils.
Third Slice: Now you're starting to feel full. The third slice might only give you
10 utils.
Fourth Slice: By this point, you’re full, and the fourth slice might give you no
satisfaction or even make you feel uncomfortable. It could have 0 utils or even
negative satisfaction (e.g., -10 utils).
As you keep consuming more slices, each one adds less and less to your total
satisfaction. Eventually, the marginal utility (extra satisfaction from each
additional slice) drops to zero or becomes negative.
Marginal Utility: The satisfaction you get from consuming one extra unit of a
good.
Example: The marginal utility of the second slice of pizza is 30 utils, while
the first slice gave 50 utils.
Total Utility: The total satisfaction from all the slices you’ve consumed.
Example: After 3 slices, the total utility is 50+30+10=90 utils.
Diminishing Marginal Utility: As you consume more of a good, the
satisfaction (marginal utility) from each additional unit decreases.
Example: The satisfaction from the first slice is much higher than the third
or fourth slice.
This happens because of saturation. The first unit of a good or service
satisfies a significant need or desire, but each additional unit provides less
satisfaction. After a point, consuming more doesn’t add any value, and it
might even make things worse (like overeating).
The graph above illustrates the Law of Diminishing Marginal Utility. It shows
how the marginal utility (additional satisfaction) decreases as more slices of
pizza are consumed.
Explanation:
X-axis: Number of slices consumed.
Y-axis: Marginal utility (measured in utils, units of satisfaction).
First slice: Provides the highest satisfaction (50 utils).
UNIT-2: Consumer Behavior and Demand Analysis 2
, Second slice: Still enjoyable but provides less satisfaction (30 utils).
Third slice: Satisfaction decreases further (15 utils).
Fourth slice: Minimal satisfaction (5 utils).
Fifth slice: No additional satisfaction (0 utils).
Sixth slice: Consuming more starts to reduce satisfaction, becoming negative
(-10 utils), as you feel overly full.
This declining pattern is the essence of the law—additional units bring less
satisfaction, and at some point, they may even bring dissatisfaction.
Implications of the Law of Diminishing Marginal Utility
Consumer Choices: People allocate their resources to maximize
satisfaction. This law explains why consumers diversify their purchases
instead of buying large quantities of a single item. Pricing Strategy:
Businesses might lower prices for additional units to entice consumers,
knowing that each extra unit is less valuable to them.
UNIT-2: Consumer Behavior and Demand Analysis 3
