Consumer's Behaviour
Utility is the want-satisfying power of a commodity. The cardinal approach (Marshall, Pigou) treats utility as measurable in "utils"; the ordinal approach (Hicks, Allen) ranks bundles. Total utility rises as marginal utility is positive, peaks when MU=0, and falls when MU<0 — the Law of Diminishing Marginal Utility. Consumer equilibrium: MUx/Px = MUy/Py.
In this chapter
Meaning of Utility
Utility is the want-satisfying power of a commodity. It is a subjective feeling — the satisfaction a person gets from consuming a good. There is no direct relation between utility and usefulness. A cigarette has utility for a smoker but is not useful for health. Economists measure utility in imaginary units called "utils". Two approaches developed over time: cardinal utility (Marshall, Pigou — measurable) and ordinal utility (Hicks, Allen — only rankable).
Cardinal vs Ordinal Utility
Assumptions of Cardinal Utility Approach
- Rationality — consumer aims to maximise utility.
- Cardinal measurement — utility can be measured in numbers (utils).
- Constant MU of money — marginal utility of money is fixed (acts as a measuring rod).
- Diminishing marginal utility — as more units are consumed, MU falls.
- Independent utilities — utility of one good does not depend on another.
Total Utility and Marginal Utility
Total Utility (TU) is the sum of satisfaction from consuming all units of a good. Marginal Utility (MU) is the additional utility from consuming one more unit. Example: eating momos at a New Road restaurant — the 1st momo gives high satisfaction; by the 5th momo you are full and the 6th may even give negative utility (discomfort).
Marginal utility and total utility (relationship)
Utility schedule — eating momos at a New Road restaurant
| No. of Momos (Q) | TU (utils) | MU (utils) |
|---|---|---|
| 1 | 10 | 10 |
| 2 | 18 | 8 |
| 3 | 24 | 6 |
| 4 | 28 | 4 |
| 5 | 30 | 2 |
| 6 | 30 | 0 |
| 7 | 28 | −2 |
- When MU > 0, TU rises
- When MU = 0, TU is maximum (saturation point)
- When MU < 0, TU falls (consumer is over-consuming). In the momo table, at Q=6 MU=0 and TU is at its peak (30 utils). At Q=7 MU=−2 and TU falls to 28 utils
Law of Diminishing Marginal Utility (LDMU)
Statement: Other things equal, as a consumer consumes more units of a good, the marginal utility from each successive unit decreases. Assumptions: (i) rational consumer, (ii) homogeneous units, (iii) continuous consumption, (iv) constant MU of money, (v) no change in consumer's tastes and income. Example: a thirsty trekker in Gosaikunda — the first glass of water gives huge satisfaction; the 5th glass gives almost none.
Law of Equi-marginal Utility (Substitution)
A rational consumer with limited income spreads spending across goods so that the last rupee spent on each good yields the same MU. This is the Law of Equi-Marginal Utility or Law of Substitution. If MUx/Px > MUy/Py, the consumer should shift spending from Y to X — MUx falls and MUy rises until equality holds. Example: a Kathmandu student has Rs 500 — he divides it between momos and tea so that the last rupee on momos gives the same satisfaction as the last rupee on tea.
Equi-marginal principle + budget constraint
Consumer's Surplus
Consumer's surplus is the difference between what a consumer is willing to pay and what he actually pays. Marshall defined it as "the excess of the price which a consumer would be willing to pay rather than go without a thing over that which he actually does pay." Formula: CS = (Total Willingness to Pay) − (Actual Price × Quantity). Example: a New Road shopper willing to pay Rs 250 for a plate of momos that costs Rs 150 — surplus = Rs 100.
Consumer's surplus (Marshall)
Practice Problem
From the table below, calculate Total Utility (TU) and Marginal Utility (MU) for each level of consumption of tea (cups per day) by a student in Pulchowk campus. Cups of tea: 1, 2, 3, 4, 5, 6 MU (utils): 12, 10, 8, 5, 2, −1
Practice Problem
A consumer in Kathmandu has Rs 240 to spend on goods X and Y. Prices are Px = Rs 10 and Py = Rs 20. The marginal utilities are given below. Find the consumer's equilibrium bundle. Units | MU_x | MU_y 1 | 100 | 80 2 | 80 | 60 3 | 60 | 40 4 | 40 | 20 5 | 20 | 0
Quick Revision
- Utility = want-satisfying power of a commodity.
- Cardinal (Marshall, Pigou): utility is measurable; Ordinal (Hicks, Allen): only rankable.
- MU = ΔTU / ΔQ = TU_n − TU_{n−1}.
- When MU>0 TU rises; MU=0 TU max; MU<0 TU falls.
- Law of DMU: more units → MU decreases.
- Equilibrium: MU_x/P_x = MU_y/P_y.
- Consumer's surplus = willingness to pay − actual price.