The Theory of Consumer Behavior – the Theory of Utility
Topic 6 - The Theory of Consumer Behavior – the theory of utility
• The theory of consumer behaviour may be analysed by either utility theory and / or indifference curve analysis.
• Note: this course only requires students to be aware of utility theory. Indifference curve analysis is undertaken in year 2 and is not a requirement of this course
Basic Principles of the theory of Consumer Behaviour
• Consumers are rational optimisers
• Consumers seek to maximise total utility
• Utility is achieved by the consumption of goods and services
• Utility / consumption is dependent on and constrained by
• budget or income
• prices of goods and services
Utility Theory
• Utility is defined as the satisfaction or pleasure which a consumer obtains from obtaining and consuming a good or service.
• Consumers are assumed to be rational optimisers seeking to maximise total utility.
Ordinal Utility
• Satisfaction levels which may be ranked but not precisely measured
Cardinal Utility
• Utility which may be measured.
➢ Much of the theory of consumer behaviour is based on ordinal utility
Total Utility
• is defined as the total satisfaction which consumers gain from the consumption of a particular good or service or combination of goods and services.
• The unit of measurement of utility is utils
Marginal utility
• is defined as the additional utility or satisfaction gained from obtaining and consuming an extra unit of a particular good or service.
• Marginal utility is also measured in utils.
• Marginal utility is measured by the following formula: MUX = ΔTU ΔX
• X represents the quantity consumed of a particular product
• An example of total and marginal utility
Qty of Product X Consumed Total Utility (utils) Marginal Utility (Utils)
0 0 -
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
Total Utility
Characteristics of total and marginal utility
• TU tends to increase as consumption increases
• TU tends to
• The theory of consumer behaviour may be analysed by either utility theory and / or indifference curve analysis.
• Note: this course only requires students to be aware of utility theory. Indifference curve analysis is undertaken in year 2 and is not a requirement of this course
Basic Principles of the theory of Consumer Behaviour
• Consumers are rational optimisers
• Consumers seek to maximise total utility
• Utility is achieved by the consumption of goods and services
• Utility / consumption is dependent on and constrained by
• budget or income
• prices of goods and services
Utility Theory
• Utility is defined as the satisfaction or pleasure which a consumer obtains from obtaining and consuming a good or service.
• Consumers are assumed to be rational optimisers seeking to maximise total utility.
Ordinal Utility
• Satisfaction levels which may be ranked but not precisely measured
Cardinal Utility
• Utility which may be measured.
➢ Much of the theory of consumer behaviour is based on ordinal utility
Total Utility
• is defined as the total satisfaction which consumers gain from the consumption of a particular good or service or combination of goods and services.
• The unit of measurement of utility is utils
Marginal utility
• is defined as the additional utility or satisfaction gained from obtaining and consuming an extra unit of a particular good or service.
• Marginal utility is also measured in utils.
• Marginal utility is measured by the following formula: MUX = ΔTU ΔX
• X represents the quantity consumed of a particular product
• An example of total and marginal utility
Qty of Product X Consumed Total Utility (utils) Marginal Utility (Utils)
0 0 -
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
Total Utility
Characteristics of total and marginal utility
• TU tends to increase as consumption increases
• TU tends to