The theory of consumer behaviour is also known as the theory of household behaviour. It is primarily concerned with how the consumer or household tries to satisfy his/her wants by dividing his or her limited amount of income between the various commodities that give him or her the amount of satisfaction.
What Is Utility?: Utility may be defined as the ability of a commodity or service to satisfy consumer's wants. Therefore, when a consumer derieves satisfaction from the consumption of any commodity or service, it can be said that the commodity or service possesses utility. In other words, any commodity or service that possesses utility is useful to the consumer that used it. As a result of the fact that usefulness is a relative term, therefore, what may be useful to one person may not be to another. This goes a long way in justifying the saying that "One man's meat is another man's poison".
Utility therefore is relative to consumer, depending on the time, place, form, etc. A commodity that can satisfy a consumer's want at a particular point in time and place may not satisfy another's want. Utility then depends on the form of the commodity, individual's time and place.
TYPES OF UTILITY
- Time Utility: This is the ability of a commodity or service to satisfy a consumer's wants at a particular time. This means that a commodity or service does not satisfy wants all the time. Some goods may not possess utility immediately they are produced. Such goods will have to be warehoused until when they are needed to satisfy consumer's needs. On some occasions, the producers deliberately warehouse there goods after production in order to command higher prices.
- Form Utility: This is the transformation of a commodity to satisfy consumer's wants. This means that the commodity does not satisfy the immediate want if consumers till when changed to bread.
- Place Utility: Some goods do not satisfy wants in places where they are produced or found. For them to satisfy consumer's wants, they have to be shifted to other places where they will be demanded. By so doing, place utility has been added to them. For iinstance, agricultural raw materials like rubber and cocoa are produced in large quantity in West Africa and transported to European nations where they satisfy industrial needs. There are basically two schools of thought in the analysis of Utility and they are as follows:
(i). Cordinal school of thought.
(ii). Ordinal school of thought.
Cardinal School of Thought: This approach emphasizes that utility is measurable. That is, after consuming a given quantity of a commodity, the consumer can simply evaluate his satisfaction through the use of figures which range from zero to infinity.
Assumptions of the Cardinal Approach
(i). Utility is measurable.
(ii). The consumer is rational.
(iii). There is diminishing marginal utility.
(iv). Total utility (TU) depends on the quantity consumed.
(v). Money income of the consumer is held constant.
TOTAL UTILITY
This is the amount of satisfaction a consumer derieves from the consumption of a particular commodity at a point in time. The amount of satisfaction derieved from commodities increases with their consumption. The more the quantity of goods available to a consumer, the more the total utility derieves from them. However, the amount of satisfaction or utility received from the consumption of goods does not increase at equal rate to the quantity of goods consumed. The consumer has a saturation point in the consumption of a particular commodity at a given time.
Total utility curve
MARGINAL UTILITY (MU)
This means the additional satisfaction a consumer derieves from the consumption of additional unit of a particular commodity. It is then the change in the total utility as a result of the consumption of additional unit of a commodity. The consumption of additional units of a commodity may yield more or less marginal satisfaction or utility.
AVERAGE UTILITY (AU)
This is the amount of satisfaction a consumer of a unit of commodity. Average utility is arrived at by dividing the total amount of utility derived by the total number of commodities consumed.
Note:
(i). TU= Average Utility × quantity consumed
(ii). MU= Change in TU÷ change in consumption
(iii). AU= TU ÷ Quantity Consumed
Marginal utility & Average Utility curve
Total, Average And Marginal Utility Schedule:
THE LAW OF DIMINISHING MARGINAL UTILITY
This law states that as a consumer consumes more and more unit of a particular commodity, utility will increase up to a certain point when decrease in satisfaction or disutility will set in as a result of continuous consumption of the same commodity. For instance, a beer drinker may derieve maximum satisfaction in the first three bottles, after which, decrease in satisfaction may set in as more and more bottles of beer are consumed until when he may be in a position not to consume any more. The satisfaction or utility derived from beer in this case, diminishes as the consumption of beer from a certain point increases.
Illustrates the law of diminishing Marginal Utility
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