In understanding any economy, it becomes very important to understand the concept of consumer behavior, which is the basis for all the transactions as well as the decisions of a company. Determining such behaviors and the theories behind them is a tough task, thus students generally need guidance for the same.
A consumer will be in equilibrium in a situation when he or she is spending all his or her income which is given to him or her while purchasing different goods in a way so that his or her total utility is maximized.
A consumer can maximize his total utility by allocating his or her income in a way that the marginal rupee which is spent on each commodity of last rupee is equal.
Utility refers to the amount of satisfaction which is consumed by a consumer from a commodity. There are two types of it which are as follows:
- Total utility: Total utility is defined as the total satisfaction by a consumer through consuming a specific quantity of a commodity.
- Marginal utility: The additional utility that is derived by a consumer through consuming additional units of commodity is called marginal utility.
There are various characteristics of utility that need to be clearly read and understood to get an effective assignment help. These characteristics are as follows:
- Utility is subjective: Utility has its independence upon the subjective estimate drawn by an individual about the amount of satisfaction which he or she is going to receive from a commodity.
- Utility is not measurable: Utility cannot be measured in objective terms as it is subjective and also satisfaction cannot be measured.
- Utility is relative in nature: Utility is not considered absolute but is relative because it has a subjective nature.
- Devoid of ethical connotations: Utility does not contain any ethical, moral or legal connotations.
Law of Diminishing Marginal Utility
Law of diminishing marginal utility tells us that marginal utility goes on decreasing when the amount of commodity which is consumed by a consumer increases, other things being equal. This law has some assumptions which are as follows:
- All the units of a commodity should be similar in color, quality, size, design, etc.
- The unit of a good should be of standard quality. For instance, a bottle of cold drink, a full mango, a cup of water, a pair of shoes, etc.
- During the process of consumption, the taste should remain unchanged. During the period of consumption, the taste of the consumer must remain the same.
- While taking consumption decisions, the consumer is rational.
While you understand the law and the assumptions behind it, to get assignment help, you further need to understand the explanations behind these laws, to enhance your work:
- As a consumer keeps on consuming a commodity, with every additional unit of a commodity intensity of desire of a consumer keeps on falling with every additional unit. Therefore, the marginal utility falls with increase in consumption of a commodity.
- When a commodity is offered in a large quantity, it will be put to all possible uses whether important or less important but if the commodity is offered in small quantity, it will be put to important use only. If commodity is put to less important use, marginal utility will be less and if commodity is put to important use, marginal utility will be more.
These mentioned points can well offer help in homework to students willing to extract the same. But this must always be augmented by the self-analysis done by the students themselves.
Consumer’s equilibrium through Cardinal Utility Approach
- The consumer is assumed to be rational, that is, he or she maximizes the utility through his or her purchases.
- Law of diminishing marginal utility comes into operation.
- The income of the consumer is given which remains constant.
- It is assumed that the prices of other commodities are given.
- Consumers’ tastes and preferences do not change.
Law of Equi-Marginal utility
This law states that a consumer will be in equilibrium when he or she allocates his or her income in different types of commodities in a way that marginal utility is equal which is spent on the last rupee of each commodity.
Limitations of Equi-Marginal utility:
- As utility cannot be measured so it becomes very difficult for the consumer to know the marginal utilities that are attained through different commodities.
- In many cases consumers are governed by habits and customs. Hence, their decisions about the purchase of different commodities are dictated more through these considerations apart from economic considerations.
- Since many consumers are ignorant therefore, they are not able to arrive at the equilibrium position.
Indifference curve analysis
It is based on scale of preference which says that a consumer can prefer any combination of two goods depending upon his situation or need. It also gives an equal amount of satisfaction to the consumers as it shows various combinations of two commodities. It has some assumptions which are as follows:
- Rationality: It means that the consumer always aims at maximizing its utility.
- Ordinal utility: Indifference curve analysis is based on the assumption that utility can only be compared but not measured.
- Non-satiety: a consumer should not be over-supplied with goods. If the consumer is over-supplied with goods, the indifference curve analysis will become null and void.
- Transitivity of choice: A consumer has a liberty of selecting any combination of commodity from A to B, B to C, or even a to C.
- Diminishing marginal Rate of Substitution: It states that as the consumer keeps on sacrificing more and more units of one commodity for another commodity, his willingness to sacrifice one commodity goes on decreasing.
The points elaborated above about consumer behavior, its laws, its explanations, etc. are well described in order to understand the theory behind this concept.