Understanding Consumer Choice
CONSUMER CHOICE
5.0: Introduction
In this unit, we shall concentrates on a consumer by looking at the behaviour of a consumer in exclusion from both other consumers and producers.
Recall that a consumer is one who uses goods and services to satisfy her wants. She is assumed to be rational meaning that he aims at utility maximization; given her income and commodity prices. There are several theories that have been developed to try and explain the behaviour of a consumer. However, they can be categorized into two distinct theories. (i) Cardinal utility theory which argues that a consumer has the capacity to measure the level of satisfaction that she derives from consumption of a given quantity of a commodity.
(ii) Ordinal utility theory which argues that a consumer cannot measure satisfaction numerically or subjectively. Instead she can rank the different baskets or bundles so as to choose the best basket.
5.1: Cardinal utility theory
The basic concept in this approach is utility, which refers to the satisfying power that a good or service consumed possesses. In this approach it is assumed that a consumer assigns a cardinal measure which can be counted. This means that a consumer can tell exactly how much satisfaction she can derive from the consumption of a certain good.
The theory assumes a cardinal measure in units called utils i.e. that utility can be measured subjectively in units called Utils using an instrument called a Utilometer..
However, some economists have suggested that utility can be measured in monetary units by the amount of money offered for a commodity.
Assumptions to the cardinal utility theory
The cardinal utility theory is based on the following assumptions;
(i) Rationality: by the term rationality in consumption, we mean that a consumer aims at maximizing her utility given her income and the price of the commodities purchased by her. The consumer will always exhaust the income if she is to maximize her satisfaction.
5.0: Introduction
In this unit, we shall concentrates on a consumer by looking at the behaviour of a consumer in exclusion from both other consumers and producers.
Recall that a consumer is one who uses goods and services to satisfy her wants. She is assumed to be rational meaning that he aims at utility maximization; given her income and commodity prices. There are several theories that have been developed to try and explain the behaviour of a consumer. However, they can be categorized into two distinct theories. (i) Cardinal utility theory which argues that a consumer has the capacity to measure the level of satisfaction that she derives from consumption of a given quantity of a commodity.
(ii) Ordinal utility theory which argues that a consumer cannot measure satisfaction numerically or subjectively. Instead she can rank the different baskets or bundles so as to choose the best basket.
5.1: Cardinal utility theory
The basic concept in this approach is utility, which refers to the satisfying power that a good or service consumed possesses. In this approach it is assumed that a consumer assigns a cardinal measure which can be counted. This means that a consumer can tell exactly how much satisfaction she can derive from the consumption of a certain good.
The theory assumes a cardinal measure in units called utils i.e. that utility can be measured subjectively in units called Utils using an instrument called a Utilometer..
However, some economists have suggested that utility can be measured in monetary units by the amount of money offered for a commodity.
Assumptions to the cardinal utility theory
The cardinal utility theory is based on the following assumptions;
(i) Rationality: by the term rationality in consumption, we mean that a consumer aims at maximizing her utility given her income and the price of the commodities purchased by her. The consumer will always exhaust the income if she is to maximize her satisfaction.