DEMAND AND CONSUMER BEHANIOR

Choice and utility Theory

In explaining consumer behavior, Economics relies on the fundamental premise that people on choose those goods and services they value most highly. To desirable the way consumer choose among different consumption possibilities, economists a century ago develop the notion of utility. In a word of utility denotes satisfaction. More precisely, it refers to how consumer ranks different goods and services. Let suppose that if a basket A has higher utility and basket B for me, this ranking indicates that me I prefer A over B.

Marginal Utility and the Law of Diminishing Marginal Utility.

Marginal Utility.

Additional utility got from the consumption of and additional unit of a commodity. For the example if we eat additional unit for ice-cream, we will get some additional unit of ice-cream, we will get additional satisfaction or utility. The increment of our utility is called the Marginal Utility.

Law of Diminishing Marginal Utility.

The amount of extra or marginal utility declines as person consumer more and more of a good is called the law of diminishing Marginal Utility. For example if we eat ice-cream more our utility that means we increase our utility that is why we should more pay of this good and services.

A Numerical Example

We can illustrate utility in numerically as in the table the table shown in column (2) that total utility (U) enjoyed increase as consumption (Q) grows,

(1)

quantity of a good consumed

(Q)

(2)

Total Utility

(U)

(3)

Marginal Utility

(MU)

0

0

0

1

4

4

2

7

3

3

9

2

4

10

1

5

10

0