Theory of Consumer Behaviour — full notes
Economics · Microeconomics - Theory of Consumer Behaviour
Theory of Consumer Behaviour
1. Two approaches to consumer theory
Cardinal approach - assumes utility can be measured in numerical units (utils). Ordinal approach - assumes consumers can only rank preferences, not measure satisfaction absolutely. Modern economics uses the ordinal approach.
2. Utility analysis and diminishing marginal utility
Total utility (TU) - total satisfaction from a given quantity. Marginal utility (MU) - additional satisfaction from one more unit. Law of diminishing marginal utility: MU tends to fall as more units are consumed.
Worked example:
| Units | Total utility | Marginal utility |
|---|---|---|
| 1 | 20 | 20 |
| 2 | 36 | 16 |
| 3 | 48 | 12 |
| 4 | 56 | 8 |
| 5 | 60 | 4 |
MU falls with every unit - this is why demand curves slope downward.