Consumer Behavior and Utility Maximization
CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION
Consumers are assumed to be rational. Given his money income and the market prices of various commodities, he plans the spending of his income so as to attain the highest possible satisfaction. It is possible to measure the amount or level of satisfaction that individuals get from consuming a commodity or a bundle of goods using the concept of utility. Two approaches to the concept of utility (Cardinalists and Ordinalists approach) describe how utility can be gauged. The analysis of how consumers make choices can be done using the budget constraint and indifference curves. An indifference curve shows various bundles of commodities that make the consumer equally happy, or give him the same level of satisfaction.
Utility Defined
Utility is a measure of the satisfaction that a consumer gets from consuming a commodity or a bundle of goods. The marginal utility of a good is the increase in utility that the consumer gets from consuming an additional unit of the good. Most goods are assumed to exhibit diminishing marginal utility ie. the more of a good a consumer already has, the lower the marginal utility derived from the consumption of an additional unit of the commodity.
The table below illustrates diminishing marginal utility. Quantity of x Total utility Marginal Consumed per week (units per week) (utility units) 0 0 0 1 20 20 2 50 30 3 60 10 4 62 2 5 60 -2
The Cardinalist vs Ordinalists’ Approach
The cardinalist approach considers utility as being measurable in monetary terms by the amount of money the consumer is willing to sacrifice for another unit of the commodity or in subjective units called utils and can be assigned a value eg. 10, 20, 30. The ordinalists say that utility is not measurable,
Consumers are assumed to be rational. Given his money income and the market prices of various commodities, he plans the spending of his income so as to attain the highest possible satisfaction. It is possible to measure the amount or level of satisfaction that individuals get from consuming a commodity or a bundle of goods using the concept of utility. Two approaches to the concept of utility (Cardinalists and Ordinalists approach) describe how utility can be gauged. The analysis of how consumers make choices can be done using the budget constraint and indifference curves. An indifference curve shows various bundles of commodities that make the consumer equally happy, or give him the same level of satisfaction.
Utility Defined
Utility is a measure of the satisfaction that a consumer gets from consuming a commodity or a bundle of goods. The marginal utility of a good is the increase in utility that the consumer gets from consuming an additional unit of the good. Most goods are assumed to exhibit diminishing marginal utility ie. the more of a good a consumer already has, the lower the marginal utility derived from the consumption of an additional unit of the commodity.
The table below illustrates diminishing marginal utility. Quantity of x Total utility Marginal Consumed per week (units per week) (utility units) 0 0 0 1 20 20 2 50 30 3 60 10 4 62 2 5 60 -2
The Cardinalist vs Ordinalists’ Approach
The cardinalist approach considers utility as being measurable in monetary terms by the amount of money the consumer is willing to sacrifice for another unit of the commodity or in subjective units called utils and can be assigned a value eg. 10, 20, 30. The ordinalists say that utility is not measurable,