Week 3 Lesson Note
TOPIC THEORY OF CONSUMER BEHAVIOUR
This SS2 Economics lesson note covers Week 3 for First Term, Week 3.
Lesson Note
TOPIC THEORY OF CONSUMER BEHAVIOUR
Sub-topics: Concept of utility (TU, AU and MU); Law of Diminishing Marginal Utility; Relationship between Marginal Utility and Demand Curve; Utility Maximisation
Learning Objectives
By the end of the lesson the student should be able to
Define consumer behaviour and explain the concept of utility.
Explain Total Utility (TU), Average Utility (AU) and Marginal Utility (MU).
State and explain the Law of Diminishing Marginal Utility.
Explain the relationship between marginal utility and the demand curve.
Explain the meaning of utility maximisation and state its condition.
A. THEORY OF CONSUMER BEHAVIOUR
Consumer behaviour refers to the way consumers make decisions about the goods and services they purchase in order to satisfy their wants with the limited income available to them.
B. CONCEPT OF UTILITY
Utility is the satisfaction or want-satisfying power that a consumer derives from consuming a good or service. In other words. It refers to the total amount of satisfaction derived from all the units of a commodity at a particular time.
C. TYPES/MEASURES OF UTILITY
a. Total Utility (TU): The total satisfaction obtained from consuming all units of a commodity.
Formula: TU = average utility ×quantity consumed
b. Average Utility (AU): average utility refers to the satisfaction which a consumer derivess per unit of a commodity consumed
Formula: AU = TU ÷ Quantity Consumed.
c. Marginal Utility (MU): The additional satisfaction obtained from consuming one extra unit of a commodity.
Formula: MU = Change in TU ÷ Change in Quantity (MU = ΔTU/ΔQ).
Illustration of TU, AU and MU
| Units Consumed | TU | MU | AU | Observation |
|---|---|---|---|---|
| 1 | 10 | 10 | 10 | Satisfaction increases |
| 2 | 18 | 8 | 9 | Satisfaction increases |
| 3 | 24 | 6 | 8 | Satisfaction increases |
| 4 | 28 | 4 | 7 | Satisfaction increases |
| 5 | 30 | 2 | 6 | Satisfaction increases slowly |
| 6 | 30 | 0 | 5 | Maximum TU |
| 7 | 28 | -2 | 4 | TU falls |
D. LAW OF DIMINISHING MARGINAL UTILITY
The Law of Diminishing Marginal Utility states that as a consumer consumes successive units of a commodity, the additional satisfaction derived from each successive unit tends to decrease, provided other factors remain constant.
Example: If a student is thirsty, the first bottle of water may give very high satisfaction. The second gives less additional satisfaction, the third even less, and so on.
E. ASSUMPTIONS OF THE LAW
1. The units of the commodity consumed are identical.
2. Consumption takes place continuously or at reasonably short intervals.
3. The consumer’s tastes and preferences remain unchanged.
F. RELATIONSHIP BETWEEN TU AND MU
1. When MU is positive, TU increases.
2. When MU is zero, TU is at its maximum.
4. When MU becomes negative, TU decreases.
5. As MU decreases, TU increases at a decreasing rate.
G. RELATIONSHIP BETWEEN MARGINAL UTILITY AND DEMAND CURVE
The marginal utility approach helps explain the downward-sloping demand curve. A consumer is generally willing to pay a higher price for the earlier units of a commodity because their marginal utility is higher. As more units are consumed, marginal utility falls, so the consumer is willing to pay a lower price for additional units
H. UTILITY MAXIMISATION
Utility maximisation is the process by which a consumer allocates limited income among different goods and services to obtain the greatest possible total satisfaction.
I. CONDITIONS FOR UTILITY MAXIMISATION
For two goods X and Y, a consumer maximises utility when the marginal utility obtained per unit of money spent is equal for both goods.
MUx/Px = MUy/Py
Or. MUA/MUB=PA/PB
Where MUx and MUy are the marginal utilities of goods X and Y, while Px and Py are their respective prices.
In simple terms, the consumer should spend money so that the last unit of money spent on each commodity gives the same marginal satisfaction.
J. IMPORTANCE OF THE THEORY OF CONSUMER BEHAVIOUR
1. It explains how consumers make purchasing decisions.
2. It helps explain the downward slope of the demand curve.
3. It assists producers in understanding consumer preferences.
Evaluation
OBJECTIVE QUESTIONS
1. Consumer behaviour refers to the way consumers
A. produce goods and services
B. make decisions about the use of their limited income
C. determine government expenditure
D. distribute national income
2. The satisfaction derived from consuming a commodity is known as
A. demand
B. utility
C. supply
D. income
3. Total Utility (TU) is the
A. additional satisfaction from one extra unit
B. average satisfaction per unit
C. total satisfaction from all units consumed
D. price paid for a commodity
4. Marginal Utility (MU) is the
A. total satisfaction from consumption
B. additional satisfaction from consuming one more unit
C. average satisfaction from all units
D. total expenditure on a commodity
5. Average Utility is calculated as
A. TU × Quantity
B. TU ÷ Quantity
C. Quantity ÷ TU
D. MU × Price
6. The Law of Diminishing Marginal Utility states that marginal utility tends to
A. increase as consumption increases
B. remain constant as consumption increases
C. decrease as successive units are consumed
D. become equal to price at all time
7. When marginal utility is zero, total utility is at its
A. minimum
B. maximum
C. lowest price
D. negative point
8. The demand curve slopes downward partly because
A. marginal utility increases continuously
B. marginal utility diminishes as more units are consumed
C. income always increases
D. supply is fixed
9. A consumer is said to maximise utility when
A. all income is saved
B. marginal utility per unit of money is equal across goods
C. the price of every commodity is zero
D. total utility is zero
10. For two goods X and Y, the condition for utility maximisation is
A. MUx × Px = MUy × Py
B. MUx/Px = MUy/Py
C. MUx + Px = MUy + Py