MICRO ECONOMICS

GROUP A MEMBERS AMANA SHAHID 14-12 ZAHRA JAMSHAID 14-03

CONSUMER BEHAVIOUR CARDINAL

APPROACH

CARDINAL APPROACH According to this approach, the utility is

measurable and can be expressed in quantitative terms Cardinal utility approach is also known as classical approach because it was presented by classical economists.

Concepts of Utility: Following are important concepts of utility Utility Total utility Marginal utility Law of Diminished Marginal utility Law of Equi marginal utility

Utility:

The characteristics of a commodity or service is to satisfy a human want. The amount of satisfaction a person derives from some commodity or service, is called utility.

TOTAL UTILITY The amount of satisfaction a person

derives from some commodity or service over a period of time, is called utility. In other words, it is the sum of marginal utilities obtained from consumption of each successive unit of a commodity or service. If continuous units of a commodity 'X' are consumed, then TUx = ∑ MUx

MARGINAL UTILIY

MU is the change in total utility when consumption of a good changes by one unit

The change in total utility resulting from one unit change in the consumption of a commodity or service per unit of time is called marginal utility

Formula Marginal utility = Change in total utility /

Change in quantity consumed or MU = ∆TU / ∆Q or MU = d TU / d Q

Relationship between Total Utility (TU) and Marginal Utility (MU):

When a consumer goes on to consume the units of a commodity continuously the marginal utility derived from the successive units of the commodity goes on to fall constantly while other factors are held constant.

quantity

Total utility

MARGIANL UTILITY

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GRAPHS OF TOTAL UTILITY OR MARGINAL UTILITY

Laws Law of diminished Margin utility Law of Equi margin utility

Law of diminish marginal utility The law of diminishing marginal utility states

that the more of a product the consumer has, the less will be its marginal utility.

FOR EXAMPLE We assume that a man is very thirsty. He

takes the glasses of water successively. The marginal utility of the successive glasses of water decreases, ultimately, he reaches the point of satiety. After this point the marginal utility becomes negative, if he is forced further to take a glass of water.

Units of commodity Marginal utility Total utility

1st glass 10 10

2nd glass 8 18

3rd glass 6 24

4th glass 4 28

5th glass 2 30

6th glass 0 30

7th glass -2 28

Law of Equi marginal utility

"A person can get maximum utility with his given income when it is spent on different commodities in such a way that the marginal utility of money spent on each item is equal".

Example . Suppose consumer has six dollars that

he wants to spend on apples and bananas in order to obtain maximum total utility. The following table shows marginal utility (MU) of spending additional dollars of income on apples and bananas:

Money (Units) MU of apples MU of bananas

1 10 8

2 9 7

3 8 6

4 7 5

5 6 4

6 5 3