Consumer Behavior

Cardinal Utility Analysis/Approach:

Definition and Explanation:

Human wants are unlimited and they are of different intensity. The means at the disposal of a man are not
only scarce but they have alternative uses. As a result of scarcity of recourses, the consumer cannot
satisfy all his wants. He has to choose as to which want is to be satisfied first and which afterward if the
recourses permit. The consumer is confronted in making a choice.

For example, a man is thirsty. He goes to the market and satisfy his thirst by purchasing coca cola
instead of tea. We are here to examine the economic forces which make him purchase a particular
commodity. The answer is simple. The consumer buys a commodity because it gives him satisfaction. In
technical term, a consumer purchases a commodity because it has utility for him. We now examine the
tools which are used in the analyzes of consumer behavior.

Concept of Utility:

Jevon (1835 -1882) was the first economist who introduces the concept of utility in economics.
According to him:

"Utility is the basis on which the demand of a individual for a commodity depends upon".

Utility is defined as:

"The power of a commodity or service to satisfy human want".

Utility is thus the satisfaction which is derived by the consumer by consuming the goods.

For example, cloth has a utility for us because we can wear it. Pen has a utility who can write with it. The
utility is subjective in nature. It differs from person to person. The utility of a bottle of wine is zero for a
person who is non drinker while it has a very high utility for a drinker.

Here it may be noted that the term ‘utility’ may not be confused with pleasure or unfulness which a
commodity gives to an individual. Utility is a subjective satisfaction which consumer gets from consuming
any good or service.

For example, poison is injurious to health but it gives subjective satisfaction to a person who wishes to
die. We can say that utility is value neutral.

Assumptions of Cardinal Utility Analysis:

The main assumption or premises on which the cardinal utility analysis rests are as under.

(i) Rationality. The consumer is rational. He seeks to maximize satisfaction from the limited income
which is at his disposal.

(ii) Utility is cardinally measurable. The utility can be measured in cardinal numbers such as 1, 3, 10,
15, etc. The utility is expressed in imaginary cardinal numbers tells us a great deal about the preference
of the consumer for a good.

(iii) Marginal utility of money remains constant. Another important premise of cardinal utility of money
spent on the purchase of a good or service should remain constant.

(iv) Diminishing marginal utility. It is also assumed that the marginal utility obtained from the
consumption of a good diminishes continuously as its consumption is increased.

(v) Independent utilities. According to the Cardinalist school, the utility which is derived from the
consumption of a good is a function of the quantity of that good alone. If does not depend at all upon the
quantity consumed of other goods. The goods, we can say, possess independent utilities and are
additive.

(vi) Introspection method. The Cardinalist school assumes that the behavior of marginal utility in the
mind of another person can be judged with the help of self observation. For example, I know that as I
purchase more and more of a good, the less utility I derived from the additional units of it. By applying the
same principle, I can read other people mind and say with confidence that marginal utility of a good
diminishes as they have more units of it.

Criticism:

Pareto, an Italian Economist, severely criticized the concept of cardinal utility. He stated that utility is
neither quantifiable nor addible. It can, however be compared. He suggested that the concept of utility
should be replaced by the scale of preference. Hicks and Allen, following the footsteps of Pareto,
introduced the technique of indifference curves. The cardinal utility approach is thus replaced by ordinal
utility function.
Consumer Behavior
A consumer is someone who makes demands in the market. If there is no consumer then there would
be no producer. If we, as a consumer won't make demand for a commodity in the market, the producer
won't produce it because it wont be sold.
To study consumer behaviour, we must know Three things.
1. Demand
2. Consumption
3. Consumer’s equilibrium (Various Utility concepts)
Demand is the willingness to buy a commodity at aparticular price and at a particular time.
There are 3 components of demand.
1. willingness to buy the product
2. willingness to pay
3. At a particular time.( if I plan to buy something after 2 yrs, then its not demand. So. time is very
importan
Goods and services need to be consumed in order to satisfy human wants. Consumption is registered
the beginning as well as the end of all economic activities.
Definition/Meaning of Consumption: Consumption means the use of goods and services in satisfying
human wants.
Kinds: a. Final b. Productive c. Quick or fast moving

d.slow
Importance of Consumption:
 Importance to the Government

 Importance to Businessman
 Importance to Household
 Importance to Society
Consumer’s equilibrium
Consumer equilibrium is a situation when a consumer derives maximum satisfaction from the given
resources.
Aim of a consumer = Deriving Maximum satisfaction from limited resources by

making choice.
Aim of a producer = To maximise his profits
Consumer equilibrium for 1 commodity

Assumptions:
Consumer behaviour is rational.
Consumer behaviour is consistent.
There are two commodities in consideration.
Consumer will attain its equilibrium (maximum satisfaction) at the point, where marginal utility of a
product divided by the marginal utility of a rupee, is equal to the price.
Consumer’s equilibrium = Marginal utility of a product /Marginal utility of a rupee = price
Consumer equilibrium for 2 commodities
Consumer will attain its equilibrium (maximum satisfaction) at the point, where marginal utility of a
product 1 divided by the price of product 1, is equal to the marginal utility of a product 2 divided by
the price of product 2.
Marginal utility of a product A/Price of A = Marginal utility of a product B/Price of B
Explanation-
 The consumer equilibrium condition determines the quantity of goods 1 and 2 that the
consumer demands,
 The price of good 1 is Rs 2 per unit and the price of good 2 is Rs 1 per unit.
 Also that the consumer has a budget of Rs 5.
 The marginal utility ( MU) that the consumer receives from consuming 1 to 4 units of goods 1
and 2 can be seen in the following table –
 If we look at column 3 and column 6 we will see that

 the consumer will buy 2 units of good 1 and 1 unit of good 2.
At this point, Marginal Utility/Price of good 1 = Marginal Utility/Price of good 2

Consumer Behavior

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Cardinal Utility Analysis/Approach:

To study consumer behaviour, we must know Three things.

Kinds: a. Final b. Productive c. Quick or fast moving

 Importance to the Government

Aim of a consumer = Deriving Maximum satisfaction from limited resources by

Consumer equilibrium for 1 commodity

Consumer’s equilibrium = Marginal utility of a product /Marginal utility of a rupee = price

Consumer equilibrium for 2 commodities

Marginal utility of a product A/Price of A = Marginal utility of a product B/Price of B

 If we look at column 3 and column 6 we will see that

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