Consumer Expenditure and Equi-Marginal Utility
Consumer Expenditure and Equi-marginal Utility
Consumer behaviour theory tries to explain the relationship between price changes and consumer demand. Utility is a concept used to denote the subjective satisfaction or usefulness attained from consuming goods and services. This concept helps to explain how consumers divide their limited income / resources among different choices of goods and services that help attain them satisfaction (utility)
The issue however is how we are supposed to measure utility and how the value of utility derived from various choices can be quantified.
Because of these issues, the consumer behaviour theory has been reformulated and utility is viewed as a way to describe preferences. It was recognised that all that mattered about utility is whether one combination of choice had a higher utility than another; by how much higher or lower didn't really matter
Preferences of consumers is the fundamental description important for analyzing choice while utility is just a simple way of describing preferences
Total utility
The total satisfaction or fulfilment received by a consumer through the consumption of a goods or services or a combination of both is defined as Total utility. For instance if a person consumes five units of a commodity and derives U1, U2, U3, U4, U5 utility from the successive units of a good, his total utility will be, TU = U1+ U2 +U3+ U4+ U5 |
Total utility increases with an increase in consumption, but as consumption rises, total utility grows at a diminishing rate.
Every unit of a good or service has a marginal utility and the total utility is a simple addition of all the marginal utilities of the units of goods or services
All consumers want to achieve the maximum possible total utility for their spending and thus they look to combine different bundles of goods and services. With their limited resources, consumers make various choices in order to increase their total utility with each additional unit of consumption.
Consumer behaviour theory tries to explain the relationship between price changes and consumer demand. Utility is a concept used to denote the subjective satisfaction or usefulness attained from consuming goods and services. This concept helps to explain how consumers divide their limited income / resources among different choices of goods and services that help attain them satisfaction (utility)
The issue however is how we are supposed to measure utility and how the value of utility derived from various choices can be quantified.
Because of these issues, the consumer behaviour theory has been reformulated and utility is viewed as a way to describe preferences. It was recognised that all that mattered about utility is whether one combination of choice had a higher utility than another; by how much higher or lower didn't really matter
Preferences of consumers is the fundamental description important for analyzing choice while utility is just a simple way of describing preferences
Total utility
The total satisfaction or fulfilment received by a consumer through the consumption of a goods or services or a combination of both is defined as Total utility. For instance if a person consumes five units of a commodity and derives U1, U2, U3, U4, U5 utility from the successive units of a good, his total utility will be, TU = U1+ U2 +U3+ U4+ U5 |
Total utility increases with an increase in consumption, but as consumption rises, total utility grows at a diminishing rate.
Every unit of a good or service has a marginal utility and the total utility is a simple addition of all the marginal utilities of the units of goods or services
All consumers want to achieve the maximum possible total utility for their spending and thus they look to combine different bundles of goods and services. With their limited resources, consumers make various choices in order to increase their total utility with each additional unit of consumption.