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The Consumer

Mr Cooney

A consumer is an individual who makes the decision whether to buy goods or services
Utility = the amount of benefit/satisfaction derived from the consumption of a good or service. (measured in Utils)

Exam Question: Assumptions Concerning Consumer Behaviour Consumers have LIMITED INCOMES their income is
not large enough to satisfy all their needs and wants. Must choose between the goods they wish to buy.

Consumers seek to get MAXIMUM UTILITY from that income (obey the Equi-Marginal Principal of Consumer Behaviour) will spend their income in such a
way that they will try and achieve the most satisfaction from the goods they buy and get the best value for money.

Exam Question: Assumptions Concerning Consumer Behaviour Consumers Act RATIONALLY will act in a manner
consistent with their preferences. E.g. If they see the same product in priced differently in two different shops they will buy the good at the lower price.

Consumers are subject to THE LAW OF DIMINISHING MARGINAL UTILITY

Economic Goods
Is a product or service which commands a price, derives utility and is transferable.

Exam Question: Characteristics of Economic Goods


Price it must command a price. The good must be scarce in relation to the demand for it , i.e. there is not enough of it to satisfy the demand of all those who want it. E.g. Fresh air is not scarce (plentiful in supply) so people are not prepare to pay for it Utility The good must provide the consumer with some feeling of satisfaction Consumers will not demand something that doesnt provide satisfaction (is a nuisance) E.g. Weeds in a garden

Exam Question: Characteristics of Economic Goods


Transferable: Ownership or benefit is capable of being given from one person to another. E.g. you can buy a chocolate bar and give it to someone but you cannot sell someone good health or beauty

Marginal Utility MU (Extra benefit)


Is the extra satisfaction a consumer gets from consuming an extra unit of a good. Schedule of the Law of Diminishing Marginal Utility (Utils = units of satisfaction)
Units of Chocolate 1
2 3 4

Total Utility
20 32 40 42

Marginal Utility
0 12 8 2

The Law of Diminishing Marginal Utility


As additional units of a good are consumed , a point will be reached where marginal utility will begin to decline.
Units of Chocolate 1 Total Utility
20

Marginal Utility
0 Point of Diminishing MU

2
3 4

32
40 42

12
8 2

EQ: Assumptions Underlying the Law of Diminishing Marginal Utility


1. It applies only after a certain minimum point (the origin) has been consumed: The origin is the minimum quantity of the commodity that must be consumed and marginal utility begins to diminish only when this stage has been reached. E.g. The first segment of the orange doesnt count, the full orange must be consumed for utility to decline.

EQ: Assumptions Underlying the Law of Diminishing Marginal Utility


2. Sufficient time has not elapsed for circumstances to change - The circumstance that could change include taste, the nature of the product and no gap in time between the consumption of successive units. E.g. If a person eats 4 mars bars in a row each additional bar will eventually give diminished marginal utility. However if a person eats one bar on Monday, one on Thursday and one on Sunday , the marginal utility may not diminish because of the time lapse.

EQ: Assumptions Underlying the Law of Diminishing Marginal Utility


3. Income doesnt change: If income rises, then the combination of goods purchased may change, affecting the marginal utility derived from the good 4. It does not apply to additive goods/medicines: In the case of goods which one becomes addictive to the LODMU does not apply. The person may gain increased marginal utility by consuming each additional unit. E.g. Cigarettes

Commodities that do not comply with the Law of Diminishing Marginal Utility
Medicine: Every dose may be just as important as the initial one and MU does not decline Addictive Goods: Alcohol & Cigarettes: The consumers MU will not decline because each extra unit consumed brings the consumer constant MU

Consumer Equilibrium
Equilibrium = the condition where there is no tendency to change. Equi-Marginal Principle / Law of Equi-Marginal Returns: shows how consumers allocate their income in such a way that the last cent spent on each good will bring the same marginal utility.

Equi-Marginal Principle / Law of EquiMarginal Returns:


Formula

Explanation using example Suppose a person has 5 to spend on 2 goods, tea and biscuits, both costing 1 each. The MU is derived below
Units of Goods 1 2 3 4 5 MU of tea 10 8 6 4 1 MU of biscuits 12 10 8 6 3

Total

29 utils

39 utils

A rational consumer would like to get maximum satisfaction from 5. They can spend their money in 3 ways: 5 may be spent on tea 5 may be spent on biscuits only Some may be spent on tea and biscuits

Equi-Marginal Principle

8 1 8 1

Therefore the consumer obeys the equi-marginal principal. If a prudent consumer spends 5 on tea, they get 29 utils (TU). If they spend 5 on biscuits they get 39 utils(TU), which is higher than tea. In order to make the best of limited resources they adjust their expenditure.

Equi-Marginal Principle
By spending 4 on tea and 1 on biscuits they get 40 utils (10 + 8 + 6 + 4 + 12 = 40) By spending 3 on tea and 2 on biscuits, they derive 46 utils (10 +8+6+12+10 = 46) By spending 2 on tea and 3 on biscuits, they get 48 utils (10 + 8 +12 +10+ 8 = 48) By spending 1 on tea and 4 on biscuits, they get 46 utils (10 + 12 +10 + 8 + 6 = 46) The rational consumer will spend 2 on tea and 3 on biscuits and will get maximum utility. When they spend 2 on tea and 3 on biscuits, the marginal utilities derived from both of these goods is equal to 8