Utility analysis and consumerism: Utility analysis and consumerism: Poles apart or is it close enough?Poles apart or is it close enough?oWhat is utility?Psychological version and scientific versionoWhat is utility analysis?oWhat is consumerism?

Utility theoryUtility theory

Quantitative analysis of consumerism.Rational approach to consumer behavior.The law of diminishing marginal utility.Market prices depends upon marginal utility

rather than total utility.Negative slope of Demand curve is linked to

diminishing marginal utility. Equimarginal principleMarginal utility of incomeAllocation of funds – to derive equal utility.

Consumerism and marginal Consumerism and marginal utilityutility

MUX MUY

------------- = ------------ PX PY

MUX PX

------------- = ------------MUY PY

Consumer responds to these prices and maximizes his satisfaction by adjusting the quantity of the various good purchased.

Elasticity of demand and utilityElasticity of demand and utility

Utility has no relation with market value Indispensible product has a very large total utility a

measured by the area under its demand curve, whereas a dispensable one has a smaller total utility.

When the price of a product rises, each consumer will reduces the purchases of that product until he values the last unit consumed at the price that must be paid for that unit.

Elasticity of a demand depends on the value consumers place on having a bit more or bit less of the product (marginal utility); it bears no necessary relation to the value they place on total consumption of the product(total utility).

Consumer surplusConsumer surplus

The difference between what consumers are willing to pay (the marginal utility) and what they do pay which is their total spending on that product is called consumer surplus.

Consumers will go on buying further until the value placed on the last unit equals the market price.

The market price of a product depends on the demand and supply. Therefore no paradox is involved when a product from which consumers receive a high quality sells for a low price and hence has only a low market value.

The paradox of valueThe paradox of value

Glasses of milk consumed per week

Total utility Marginal utility

Consumer surplus @Rs.0.30/glass

1 3.0 3.0 2.7

2 4.5 1.5 1.2

3 5.5 1.0 0.7

4 6.3 0.8 0.5

5 6.9 0.6 0.3

6 7.4 0.5 0.2

7 7.8 0.4 0.1

8 8.1 0.3 0.0

9 8.35 0.25

10 8.55 0.2

ConclusionConclusion

Market, consumer and capital share a supplementary relationship.Even though consumerism and utility are in the

opposite ends, there exists a healthy relationship between consumerism and utility.

The tendency of people to make themselves identify strongly with the products or services they consume.

The utility acts as a guiding force in the synthesis of consumer behavior. It acts a regulatory force which keeps equimarginal balance in the economic activities.