1. Lecture #5
Consumer Behavior, Utility Analysis, Law of
Diminishing Marginal Utility, Law of Equi-
Marginal Utility

2. • Consumer Behavior
• Utility
Total Utility
Marginal Utility
• Utility Analysis
Cardinal Utility Analysis
Ordinal Utility Analysis
• Law of Diminishing Marginal Utility
Schedule and Curve of Law
Relationship between Marginal Utility and Total Utility
Assumptions of Law
Exceptions of Law
• Law of Equi-Marginal Utility
Assumptions of Law
Schedule and Curve of Law
Limitations of Law
remember you and I are here
“to learn from each other”
Contents….

3. Consumer Behavior
• Consumer Behavior is to achieve maximum
level of satisfaction by spending his income.
• Consumer wants to maximize its utility……

4. Utility
• Utility is want satisfying power of consumer.
• Utility of good is a satisfaction or pleasure one gets from
consuming it.
Characteristics of Utility
• Utility and usefulness are not synonyms. For
example, painting of Picasso may be a great utility to art but
is useless.
• Utility is Subjective, utility of a product may vary widely from
person to person.
• Utility is difficult to quantify, But for the purpose of
illustration it is assumed that utility can be measured with
the units called “utils”. For example, a particular consumer
may get 100 utils from coke, 50 utils from biscuits.

5. Total Utility and Marginal Utility
Total Utility:
• Total amount of satisfaction a person derives from
consuming some specific quantity of good or services.
Marginal Utility:
• Extra satisfaction a consumer receive from consuming
additional unit of a product.
• Marginal utility is change in total utility that results
from consumption of one more unit of a product.

6. Utility Analysis
Cardinal Utility Analysis
• Alfred Marshal
• Utility can be measured in
imaginary units that are called
“Utils”.
• Law of Diminishing Marginal
Utility
• Law of Equi-Marginal Utility
Ordinal Utility Analysis
• J.R. Hicks & R.G.D. Allen
• Can not measured but
compared as rank
• Indifference curve

7. Law of Diminishing Marginal Utility
• Law of diminishing marginal utility states
that, “as a consumer consume more and more
units of specific commodity, utility from
successive units goes on diminishing.”

8. Law of Diminishing Marginal Utility
1 432 65 7
Units Total
Utility
Marginal
Utility
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
MU curve is downward sloping because of
the fact that consumption of successive
units gives less satisfaction.
Negative MU

9. Relationship between Marginal Utility and Total Utility
Maximum TU
Negative MU
 TU is increasing, but it increases by smaller and
smaller amount for each additional unit. In other
words, TU is increasing at decreasing rate.
 MU curve is downward sloping because of the fact
that consumption of successive units gives less
satisfaction.
 Increasing TU Diminishing MU
 Maximum TU Zero MU
 Decreasing TU Negative MU
Units Total
Utility
Marginal
Utility
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

10. Assumption of Law
• Various units of goods are homogenous. i.e. identical in
size shape, quality, quantity etc.
• The units of consumption are of reasonable size. The
consumption is normal.
• There is no time gap between consumption of different
units.
• Consumer is rational and he aims at maximum of
satisfaction.
• Taste, preferences and Fashion remains unchanged.
• There must not be change in consumer behavior during
consumption. A change in state of mind affects the
validity of the law.

11. Exception of Law
• Case of intoxicants: Consumption of liquor defies
the law for short run, the more a person drinks
the more he likes it.
• Application of money: More money the man has
more greedy.
• Rare collections. Collection of rare goods
increase the marginal utility. Like collection of
rare stamps and coins.
• Reading: Reading of more books gives more
knowledge and in turn greater satisfactions.

12. Law of Equi-Marginal Utility
• “Total utility from a given amount is maximum when it
is spend on various goods in such a way that marginal
utility of money spent on each good becomes equal”.
• “Total utility of a given amount is maximum when it is
spent on the principle of
MUA/PA= MUB/PB=…………MUN/PN
Where MUA is marginal utility of product A and PA
represent price of product A.
• “Other things remaining the same, consumer spend his
income in such a way that the marginal utility of last
unit of each an every commodity must be equal”.

13. Law of Equi-Marginal Utility
• This is called…..
• law of satisfaction because we substitute more
useful goods to less useful goods.
• law of maximum satisfaction because through it
we get maximum satisfaction.
• law of equi-marginal utility because through it
when the marginal utilities are equalized, through
the process of substitution, the maximum
satisfaction is attained.

14. ASSUMPTIONS OF LAW
• Rationality: Every consumer should be rational in the
purchase of goods. His aim should be to maximize the total
utility and nothing else.
• Application of Diminishing Marginal Utility: Law of
diminishing marginal utility is applicable on the
commodities consumed by consumer.
• Limited income: The income is given that consumer wants
to spend on different goods at particular time.
• Substitution of Goods: It is assumed that goods are
naturally substitutes of each other. The result of
substitution will be the MU of one commodity will fall and
that of another commodity will rise.
• Awareness of Market: It is assumed that consumer has
much awareness about the market.
• Divisibility of Goods: The law is based on the assumption
that goods are divisible in small units.

15. In the following example…
• Consumer consume mango and apple
• Consumer income is 10 Rs.
• Price of mango and apple is 2 Rs.

16. Law of Equi-Marginal Utility Schedule
Units MU of Apple MU of Mango MUA/PA MUM/PM
1 20 18 10 9
2 18 16 9 8
3 16 14 8 7
4 14 12 7 6
5 12 10 6 5
TU 5 apple & 0 mango 40
TU 4 apple & 1 mango 43
TU 3 apple & 2 mango 44
TU 2 apple & 3 mango 43
TU 1 apple & 4 mango 40
TU 0 apple & 5 mango 35
 Consumer maximize its total utility by consuming 3
units of apple and 2 units of mango. At this point his
total utility is 44.
TU=Maximum
 Any point other then this will yield less total utility.
MUA/PA = MUM/PM
8 = 8

17. Units of MangoUnits of Apple
MUM/PM
MUA/PAConsumer maximize its total utility by consuming 3 units of apple and 2 units of
mango. At this point his total utility is 44.
Any point other then this will yield less total utility.
For example, 2 units of apple and 3 units of mango gives total utility of 43, which is less
then previous combination.

18. Limitation of Law
• No Cardinal Measurement: Utility is mental phenomenon and it is not
possible to measure. So the equi-marginal utilities of commodities is
not possible to measure.
• Rationality: Consumer are not so rational about commodities of daily
use and cannot calculate utility.
• No Availability of Substitutes: Due to unavailability of substitutes for
some commodities the equality of marginal utility is not possible.
• Customs: Customs are generally so powerful that they make the
consumption of a commodity compulsory. The operation of this law is
impeded by custom.
• Fashion: Sometimes a person follows a fashion against his wish. He
thus spends money on an article which gives him less satisfaction and
not on which would yield greater satisfaction. The law of equi marginal
utility is disturbed in practice again.
• Ignorance: If people do not know accurately the prices of various
commodities, they cannot obtain maximum satisfaction out of their
expenditure. They may purchase a commodity at a higher price when it
is really available at a lower price.
• Indivisibility: Some commodities are not divisible to the extent
required for equalization of marginal utility.