Consumer Behaviour and Marginal Utility

Micro-Economics Report of Microeconomics Submitted by: Sultan Lashari 10 2629 Submitted To: SIR MICHAEL SIMON

Program: BACHELORS OF BUSINESS ADMINISTRATION FALL 2010
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National University of Computer & Emerging Science Management Science Department, Karachi, Campus ACKNOWLEDGEMENT

I would like to thank Allah Almighty for giving me the strength that made it possible for me to make this report. I am also truly indebted to our course instructor Sir Michael Simon whose tremendous guidance and knowledge played a key role in the making and completion of this report.

I am also grateful to my parents for their moral support and valuable prayers. Thank you for the ones who supported me. I wouldn’t have been standing here without you all, feeling proud on accomplishing the task that was assigned to me.

Thanks
Sultan Lashari
10 2629

LETTER OF TRANSMITTAL
TO: Sir Michael Simon, Instructor micro economics FROM: Sultan Lashari, 10K 2629
DATE: 29th/November/ 2010

SUBJECT: Consumer behavior and Marginal utility
We present our report on “CONSUMER BEHAVIOR AND MARGINAL UTILITY” that was assigned to us. This report provides information related to rational behavior of individual and utility of individual
This report is divided into some parts, such as the INTRODUCTION. This part gives the overview. Second heading is CONSUMER BEHAVIOR. It consists of definition and we have also explained its ASSUMPTIONS in the third heading .The fourth part give the information about UTILITY. The fifth and sixth part explains the topic with the heading TOTAL UTILITY AND MARGINAL UTILITY respectively. After that in the seventh part we have discussed the LAW OF DIMINISHING MARGINAL UTILITY. We have also explained UTILITY MAXIMAIZATION RULE AND APPLICATION in the third last and second last part, and the last part focuses on the CONCLUSION.

Table of Contents
Executive summary …………………………………………………………………………………………………………………….5 1.Introduction 6 2.Consumer behavior 6 6. Utility ………………………………………………………………………………………………………………………………………...9 7. Total utility …………………………………………………………………………………………………………………………………9 8. Marginal utility ………………………………………………………………………………………………………………………..…9 9. Law of diminishing marginal utility …..………………………………………………………………………………………..9 10. Utility maximization rule ………………………………………………………………..………………………………………….9 11. Application ………………………………………………………………………………………………………………….…..…....10 12. Conclusion ...............................................................................................................................……11 13. Bibliography ……………………………………….………………………………..………………………………………………….12

Executive Summary

Consumers allocate their money income among many goods and services available for purchase. The consumer behavior has four dimensions; rational behavior, preferences, budget constraint and prices. Utility (total utility) can be defined as the (total) pleasure derived by doing some act. Marginal utility can be defined as extra satisfaction obtained by consuming additional units of a product. The law of diminishing marginal utility states that as the total utility increases the marginal utility decreases and as the marginal utility becomes negative the total utility decreases.

1. Introduction
This report includes the information related to the CONSUMER BEHAVIOR AND MARGINAL UTILITY.
It also tells us about the ASSUMPTIONS OF CONSUMER BEHAVIOR, THE LAW OF DIMINISHING MARGINAL UTILITY AND UTILITY MAXIMAIZATION RULE.
It also explains the APPLICATION AND CONCLUSION.

2. Consumer behavior
Consumer behavior means the Study of when, why, how and whether people buy or not buy a product. It is based on consumer buying behavior with consumer playing three distinct roles of user, payer and buyer. It attempts to understand the buyer decision making process.

3. ASSUMPTIONS OF CONSUMER BEHAVIOR
Following are the assumptions of consumer behavior: 1. Rational behavior 2. Preferences 3. Prices 4. Budget constraint

* Rational behavior
The consumer is a rational person who tries to use his or her money income to derive a greatest amount of satisfaction or utility from it. Consumer wants to get the most of the money or technically, to maximize their total utility. * Preferences
Each consumer has clear-cut preferences for certain of the goods and services that are available in the market. A buyer also has the good idea of how much marginal utility they will get from successive units of various products that might purchase. * Prices
Every good carries a price tag. We assume that the price tags are not affected by the amounts of specific goods each person buys. After all each person purchase is the tiny part of total demand also

Because the consumer has a limited number of dollars, he or she cannot buy every thing wanted.
The consumer must compromise; he or she must use the most satisfying mix of goods and services. Different individual will choose different services. * BUDGET CONSTRAINT
The consumer has a fix money income consumers supplies a finite amount of resources, he or she carries only limited income. Every consumer faces a budget constraint, even consumers who earns millions of dollars per year of course this budget limitation is more severe for a consumer with in average income than for a consumer with in extra ordinary high income

4. INDIFFERENCE CURVE
An indifference curve shows all the combinations of two products that will yield same amount of total satisfaction or total utility to the consumer.
PROPERTIES OF INDIFFERENCE CURVES: * Convex to origin. * Downward sloping. * Tangency showing consumer’s equilibrium. * They never intersect. 5. UTILITY
The satisfaction derived from consuming a product is called utility. A rational consumer always tries to maximize his utility. Utility is subjective and it is difficult to quantify. 6. TOTAL UTILITY
The total satisfaction derived from consumption of a product is called total utility of that product. 7. MARGINAL UTILITY
The marginal or extra satisfaction derived from the consumption of each extra unit of a particular product. 8. LAW OF DIMINISHING MARGINAL UTILITY
It states that:
“As the total utility increases the marginal utility decreases and as the marginal utility becomes negative the total utility decreases” 9. UTILITY MAXIMAIZATION RULE
MBx = MUx/Px
The MB of product X can be measured by finding the MU per dollar spent on product X
MCx = MUy/Py
The MC of product X can be measured by finding the MU that you are not receiving from a dollar 's worth of your next best alternative (product Y)
Therefore:
MB = MC or
MUx / Px = MUy / Py
To obtain the greatest utility the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.

10. APPLICATION THE DIAMOND-WATER PARADOX The paradox is resolved when we look at the abundance of water relative to diamonds. Theory tells us that consumers should purchase any good until the ratio of its marginal utility to price is the same as that ratio for all other goods. The marginal utility of an extra unit of water may be low as is its price, but the total utility derived from water is very large. The total utility of all water consumed is much larger than the total utility of all diamonds purchased. However, society prefers an additional diamond to an additional drop of water, because of the abundant stock of water available. 11. CONCLUSION
It is important and vital that companies study different aspects of consumer behavior to formulate successful marketing strategies.

BIBLIOGRAPHY

Chisnall, P.M. (1992): Marketing: A Behavioural Analysis, McGraw-Hill, London.
Grunert, K.C. (1988): Research in Consumer Behaviour: Beyond Attitudes and Decision Making, European Research, Vol. 16.
Hoyer W and MacInnis D (2000): Consumer Behaviour, 2nd Ed Houghton Mifflin.
Loudon, D.L. (1988): Consumer Behaviour; Concepts and Applications, McGraw Hill, London.
Peter J.P., Olson J.C. and Grunert K.G. (1999): Consumer Behaviour and Marketing
Strategy, European Edition McGraw Hill.
Schiffman, L.G. (1993): Consumer Behaviour, Prentice Hall International, London.
Schwartz, B. (2004): The Paradox of Choice; Why More Is Less, Ecco, New York, NY.
Solomon, M.R. (1994): Consumer Behaviour, Allyn & Bacon, London.
Solomon M, et al (2002): Consumer Behaviour: A European Perspective, 2e, Prentice Hall Europe.
Stern, L.W., El-Ansary, A.I. (1992): Consumer Behaviour; an Information Processing Perspective, Prentice Hall, Englewood Cliffs, NJ.

Bibliography: Grunert, K.C. (1988): Research in Consumer Behaviour: Beyond Attitudes and Decision Making, European Research, Vol. 16. Hoyer W and MacInnis D (2000): Consumer Behaviour, 2nd Ed Houghton Mifflin. Loudon, D.L. (1988): Consumer Behaviour; Concepts and Applications, McGraw Hill, London. Peter J.P., Olson J.C. and Grunert K.G. (1999): Consumer Behaviour and Marketing Strategy, European Edition McGraw Hill. Schiffman, L.G. (1993): Consumer Behaviour, Prentice Hall International, London. Schwartz, B Solomon, M.R. (1994): Consumer Behaviour, Allyn & Bacon, London. Solomon M, et al (2002): Consumer Behaviour: A European Perspective, 2e, Prentice Hall Europe. Stern, L.W., El-Ansary, A.I. (1992): Consumer Behaviour; an Information Processing Perspective, Prentice Hall, Englewood Cliffs, NJ.