Principles of Economics (1) I.

Com Part I

CHAPTER # 2
Consumer’s Behavior
The word behavior means way of action. It also means anything a person does that can be
observed in some way.

Consumption:
Consumption means the use of goods and services for direct satisfaction i.e. drinking of water,
treatment from doctor etc.

Consumer Behavior:
The behavior of the people with regard to selection, purchase and consumption of goods and
services for satisfaction of their wants is known as consumer behavior.

Human wants:
Human wants means desire to get and use goods and services which provide satisfaction.
Human wants are of two types.
1. Economic wants:
The wants that are satisfied with the use of money is called Economic Want. For Example;
house, pen, cold drink etc.
2. Non-Economic Wants:
The wants that are satisfied without the use of money is called Non-Economic Want. For
Example; air, sunlight etc.

Goods:
All material things used by human beings to satisfy their wants are called goods. For Example;
book, mobile, car etc. Goods are of two types.
1. Consumer goods:
Those goods which satisfy human want directly are called consumer goods i.e. wheat, rice,
mobile etc.
2. Capital goods:
Those goods which are used for the production of other goods or for earning income is called
capital goods i.e. machinery, tools etc.

Services:
Those action of person or group of persons which can satisfy other people wants are called
services i.e. services of doctor, professors, engineers etc.

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (2) I.Com Part I

Utility:
“The power or ability of any good or service to satisfy human want is called utility”. Hence
utility means satisfaction which a person derives from the consumption of any good or service.
For example water has the power to satisfy thrust, bread has the power to satisfy hunger etc.
Utility and Usefulness:
Utility does not mean usefulness. Many goods are harmful to human health but they have
utility i.e. wine, opium, cigarette, heroin etc.
Determinants of Utility:
Utility attain form the consumption of any good depends upon the following.
1. Intensity of want 3. Change in shape 5. Change of ownership
2. Time or Weather 4. Change in place 6. Different uses
Initial Utility:
Utility of the first unit of commodity consumed is called Initial Utility.
Positive Utility:
As long as use of any commodity gives satisfaction, its utility is called Positive Utility.
Negative Utility:
When the use of any commodity gives dissatisfaction then its utility is called Negative Utility.
Zero Utility or Point of Saturation:
When the use of any commodity does not provide any satisfaction, it is called zero utility.
When desire of good is fully satisfied and consumer has no desire to consume further units, it is
called point of satiety or zero utility.

Q. No.1
What is the relationship between Total Utility and Marginal Utility?
Explain with schedule and diagram.
Ans:
Total Utility:
Utility which is attained from the use of all units of a commodity in a specific time is called total
utility. Total utility is the addition of marginal utility.
Marginal Utility:
Utility of the additional unit consumed is called Marginal Utility. Marginal utility is the rate of
change in total utility. ∆TU
MU =
∆Q

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (3) I.Com Part I

Relationship between Total Utility and Marginal Utility:

The relationship between TU and MU are as under. Diagram:
1. When MU is positive TU increases.
2. When MU is zero TU is maximum.
3. When MU is negative TU decreases.
Schedule:
Units of Marginal Total
Good Utility Utility
1 20 20
2 15 35
3 10 45
4 5 50
5 0 50
6 -5 45
It is clear from the table and diagram that marginal utility is positive up to 4 th unit while total
utility increases. At 5th unit marginal utility is zero. At this point total utility is maximum. This is
saturation point. Here the consumer desire is fully satisfied. At 6th unit marginal utility become
negative and here the total utility starts decreasing.

Q. No.2
Explain the law of Diminishing Marginal Utility with the help of
schedule and diagram. Also describe its assumptions and limitations.
Ans:
Introduction:
Classical gave the concept of “measurable utility” and made it obvious with the attainment of
cardinal approach. This approach is based on the notion “utility can be measured into numbers
like 10, 20, and 30 with utilo-meter”.
Law of Diminishing Marginal Utility:
According to Marshall:
“The additional benefit which a person derives from an increase of his stock of a thing
diminishes with every increase in the stock that he already has”.
According to Chapman:
“The more we have of a thing, the less we want additional increment of it”.
In simple words:
“Other things remaining the same, continuous use of units of a commodity gives less and less
satisfaction (Marginal Utility) till it reaches to zero and then become negative”.

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (4) I.Com Part I

Schedule: Units Marginal Total

This law can be explained by taking a very simple example. (Glass of water) Utility Utility
Suppose a person starts drinking water. The first glass of
1 10 10
water gives him great pleasure (10 utils), the second glass
2 8 18
of water gives him less satisfaction (8 utils) and the
3 6 24
satisfaction of the third glass of water (6 utils) is less than
4 4 28
the previous one and so on. The marginal utility
5 2 30
diminishes with every next glass of water till it goes down
6 0 30
to zero and then become negative.
7 -2 28
Diagram:
In the figure, the marginal utility of different glasses of
water is measured on the y-axis and the units (glasses
of water) on X-axis. With the help of the schedule, the
points A, B, C, D, E, F and G are derived by the
different combinations of units of the commodity and
the marginal utility. By joining these points, we get the
marginal utility curve. The marginal utility curve has
the downward negative slope. It intersects the X-axis
at the point of 6th unit of the commodity. At this point "F" the marginal utility becomes zero.
When the MU curve goes beyond this point, the MU becomes negative.

Assumptions:
Law of diminishing marginal utility is based on the following assumptions.
1. Cardinal Measurement:
The utility is measurable and a person can express the utility in numbers such as 2 utils, 4 utils,
6 utils, etc.
2. Rationality:
It is assumed that the consumer is rational and his aim is maximum utility.
3. Continuous Use:
The law holds only when units of a commodity are consumed continuously. There should be no
gap or interval between using the units of commodity. A gap or delay in use may loss the
concept of diminishing marginal utility.
4. Suitable Units:
The law applies when units consumed are of suitable size e.g. when a person is thirsty and he
starts drinking water drop by drop, the utility of water will increase instead of decrease because
the units consumed are not suitable.

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (5) I.Com Part I

5. Homogeneous Units:
It is assumed that the units consumed should be homogeneous. If the lateral units are superior
to the previous units, the utility of lateral units will increase instead of diminishing.
6. Taste, Fashion, Customs and Habits Remain the Same:
The taste, fashion and habits of a consumer is assumed to be constant during consumption of a
commodity i.e. a student is eating an apple and during consumption, he is told that apples are
more useful for his memory, the utility will increase rather than decrease.
7. Consumer’s Income Remain the Same:
The law holds when the income of consumer remains constant i.e. if income of consumer
increase, his purchasing power increase and demand for goods and services increase which
shows more value i.e. greater utility.

Exceptions or Limitations:
Following are the limitations of the law.
1. Rare Collections:
The law does not hold in the case of rare collection and antiques. If a man is collecting rare
collection, the more he is able to collect, the greater will be his satisfaction e.g. collection of
ancients coins, stamps, paintings etc.
2. Money, Income and Wealth:
The law does not apply to wealth because wealth gives us purchasing power and we like to get
as much wealth as we can.
3. Knowledge:
The law does not apply on knowledge. As a person acquire more and more knowledge his
desire for getting more knowledge increases.
4. Narcotics and Intoxicants:
The law does not hold well in case of narcotics and intoxicants. A person who is addicts of
intoxicants his utility for successive units increase instead of decrease.
5. Fashion and Demonstration:
Utility of a commodity depends upon fashion. A dress in fashion or used to snob and
ostentation has a greater utility and a dress out of fashion has less utility.

Importance of the Law:

The importance of the law is shown by the following points.
1. Guidance to consumers.
2. Base of law of demand.
3. Guidance to finance minister for taxation.

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (6) I.Com Part I

Q. No.3
Explain the law of Equi-marginal utility with the help of schedule and
diagram. Also describe its assumptions and limitations.
Ans:
Introduction:
Classical gave the concept of “measurable utility” and made it obvious with the attainment of
cardinal approach. This approach is based on the notion “utility can be measured into numbers
like 10, 20, and 30 with utilo-meter”.

Law of Equi-Marginal Utility:

According to Marshall:
“If a person has a thing, which he can put to several uses, he will distribute it among these uses
in such a way that it has the same marginal utility in all”.
In simple words:
“Other things remaining the same, equilibrium position reaches when marginal utility of all the
commodities purchased are exactly equal”.

Consumer’s Equilibrium:
A consumer attains equilibrium when he spends his limited income on different goods in such a
way that MU and their price ratio become equal.
MUA MUB MUC MUX
= = = ----------------- =
PA PB PC PX

Schedule: Units of M.U M.U

Law of Equi-marginal utility can be explained with the help of money of X of Y
schedule. 1 12 10
Here we can assume that 2 10 8
1. Consumer has a given income of Rs.5 3 8 6
2. He purchases only two commodities X and Y. 4 6 4
3. Prices of both commodities are Rs.1 for a unit. 5 4 2
4. Marginal utility of both commodities are given. Total 40 30
5. Consumer is rational.
It is clear for the table that Consumer has various combinations in his mind.
Combination 1:
If the consumer spends whole of his income (Rs.5) on commodity X, total satisfaction is
12+10+8+6+4 = 40.

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (7) I.Com Part I

Combination 2:
If he spends whole income (Rs.5) on commodity Y, the total satisfaction is 10+8+6+4+2 = 30.
Combination 3:
But if the consumer spends 3 units of money on commodity X and 2 units of money on
commodity Y, his total satisfaction will be maximum 12+10+8+10+8=48 because marginal
utilities of last units of both commodities are equal and if consumer spends his income except
this, his total satisfaction will not be maximum. It means that consumer gets maximum
satisfaction when he purchases 3 units of X and 2 units of Y.
This is the reason that this law is called “law of maximum satisfaction”. This law is also called
“law of substitution” and “law of indifference”.

Diagram:
In diagram the units of money
are taken on x-axis and marginal
utility at y-axis. Consumer is in
equilibrium position when he is
spending 3 units on commodity X
and 2 units on commodity Y but
if spend 4 units on commodity X
and 1 units on commodity Y than
the gain in utility is less than loss
in utility, so satisfaction will not
be maximum. The only single position where consumer gets maximum satisfaction is that when
marginal utilities of both commodities are equal.

Exceptions or Limitations:
Following are the limitations of the law of Equi-marginal utility.
1. Measurement of Utility is Impossible:
Utility is a mental phenomenon so it is not possible for a consumer to show utility in numerical
values, so we can neither add, nor compare and equalize utility.
2. Indivisibility of Goods:
The law is not applicable in case of indivisible goods e.g. motorcycle, tractor, cow, and fan etc.
Therefore utility of individual parts cannot be compared.
3. Ignorance of Consumer:
Some consumers are not aware of the useful alternatives. Therefore no substitution taken
place and law does not hold true.

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (8) I.Com Part I

4. Snobbery, Ostentation and Fashion:

The law does not hold well when people spend money under the influence of ostentation and
fashion. In such causes they do not equalize marginal utility or tries to attain maximum
satisfaction.
5. Time Period:
It is rare chance that goods purchased are exactly used in given time period. Some commodities
are consumed before the expected period while some goods are used more than the expected
period. So the idea of utility becomes wrong i.e. either we under estimate or over estimate
utility.

Importance of the Law:

1. Guidance to consumers.
2. Guidance to Producers.
3. Guidance to finance minister for taxation.
4. Guidance to government to spend his income.
5. Guidance for exchange.
6. Guidance for distribution of wealth.

Short Questions
Q.No.1: What do you mean by Consumption?
Ans: Consumption means the use of goods and services for direct satisfaction i.e. drinking of
water, treatment from doctor etc.
Q.No.2: Define Consumer’s Behavior.
Ans: The behavior of the people with regard to selection, purchase and consumption of goods
and services for satisfaction of their wants is known as consumer behavior.
Q.No.3: Differentiate between Economic Wants and Non-Economic Wants.
Ans: The wants that are satisfied with the use of money is called Economic Want. For Example;
house, pen, cold drink etc.
The wants that are satisfied without the use of money is called Non-Economic Want. For
Example; air, sunlight etc.
Q.No.4: Differentiate between Goods and Services.
Ans: All material things used by human beings to satisfy their wants are called goods. For
Example; book, mobile, car etc.
Those action of person or group of persons which can satisfy other people wants are called
services i.e. services of doctor, professors, engineers etc.

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (9) I.Com Part I

Q.No.5: Differentiate between Consumer goods and capital goods.

Ans: Those goods which satisfy human want directly are called consumer goods i.e. wheat, rice,
mobile etc.
Those goods which are used for the production of other goods or for earning income is called
capital goods i.e. machinery, tools etc.
Q.No.6: Define Utility.
Ans: “The power or ability of any good or service to satisfy human want is called utility”.
Q.No.7: Differentiate between Utility and Usefulness.
Ans: “The power or ability of any good or service to satisfy human want is called utility”.
Utility does not mean usefulness. Many goods are harmful to human health but they have
utility i.e. wine, opium, cigarette, heroin etc.
Q.No.8: Write four determinants of Utility.
Ans: Utility depends upon the following determinants.
1. Intensity of want 3. Change in shape 5. Change of ownership
2. Time or Weather 4. Change in place 6. Different uses
Q.No.9: Define Initial Utility.
Ans: Utility of the first unit of commodity consumed is called Initial Utility.
Q.No.10: Define Positive Utility.
Ans: As long as use of any commodity gives satisfaction, its utility is called Positive Utility.
Q.No.11: Define Negative Utility.
Ans: When the use of any commodity gives dissatisfaction then its utility is called Negative
Utility.
Q.No.12: What do you mean by Zero Utility?
Ans: When the use of any commodity does not provide any satisfaction, it is called zero utility.
Q.No.13: Define Point of Saturation.
Ans: When desire of good is fully satisfied and consumer has no desire to consume further
units, it is called point of satiety or zero utility.
Q.No.14: Define Total Utility.
Ans: Utility which is attained from the use of all units of a commodity in a specific time is called
total utility. Total utility is the addition of marginal utility.
Q.No.15: Define Marginal Utility.
Ans: Utility of the additional unit consumed is called Marginal Utility. Marginal utility is the rate
of change in total utility. ∆TU
MU =
∆Q

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (10) I.Com Part I

Q.No.16: Describe the relationship between Total Utility and Marginal Utility.
Ans: The relationship between TU and MU are as under.
1. When MU is positive TU increases.
2. When MU is zero TU is maximum.
3. When MU is negative TU decreases.
Q.No.17: Define Law of Diminishing Marginal Utility.
Ans: “The more we have of a thing, the less we want additional increment of it”.
Q.No.18: Write four assumptions of Law of Diminishing Marginal Utility.
Ans: Law of Diminishing Marginal Utility has the following assumptions.
1. Cardinal Measurement 3. Suitable Units
2. Continuous use 4. Homogeneous Units
Q.No.19: Write four limitations of Law of Diminishing Marginal Utility.
Ans: Law of Diminishing Marginal Utility has the following limitations.
1. Rare Collections 3. Knowledge
2. Income and Wealth 4. Narcotics
Q.No.20: Write three points of importance of Law of Diminishing Marginal Utility.
Ans: The importance of the law is shown by the following points.
1. Guidance to consumers. 3. Guidance to finance minister.
2. Base of law of demand.
Q.No.21: Define Law of Equi-Marginal Utility.
Ans: “If a person has a thing, which he can put to several uses, he will distribute it among these
uses in such a way that it has the same marginal utility in all”.
Q.No.22: Define Consumer Equilibrium.
Ans: A consumer attains equilibrium when he spends his limited income on different goods in
such a way that MU and their price ratio become equal.
Q.No.23: Write the equation of Consumer equilibrium.
Ans: MUA MUB MUC MUX
= = = ----------------- =
PA PB PC PX

Q.No.24: What are the other names of Law of Equi-Marginal Utility?

Ans: Other names of Law of Equi-Marginal Utility are Law of Indifference & Law of Substitution.
Q.No.25: Write four limitations of Law of Equi-Marginal Utility.
Ans: Law of Equi-Marginal Utility has the following Limitations.
1. Measurement of utility is not possible. 3. Ignorance of Consumers
2. Indivisibility of goods 4. Snobbery and Fashion

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (11) I.Com Part I

Q.No.26: Write three points of importance of Law of Equi-Marginal Utility.

Ans: The importance of the law is shown by the following points.
1. Guidance to Consumers 2. Guidance to Producers
3. Guidance to Finance Minister for Taxation

Multiple Choice Questions

Four possible answers are given for the following questions. Choose the correct answer.
1. Consumer’s Behavior means
a. Selection c. Consumption
b. Purchase d. All of these
2. One of the following is Non-Economic Want
a. Car c. Fan
b. Book d. Self respect
3. The price of non-economic want is always
a. Very high c. Zero
b. Very low d. Negative
4. Consumer goods are those goods which the consumers consume
a. Directly c. Sometimes
b. Indirectly d. Never
5. Feature of a commodity to satisfy human want is called
a. Usefulness c. Value
b. Utility d. Wealth
6. Utility is related with
a. Usefulness c. Necessities
b. Useless d. Desire
7. Utility of the first unit of a commodity consumed is called
a. Marginal Utility c. Total Utility
b. Initial Utility d. Zero Utility
8. Utility of the next unit of a commodity consumed is called
a. Total Utility c. Positive Utility
b. Marginal Utility d. Negative Utility
9. Utility of the last unit of a commodity consumed is called
a. Positive Utility c. Marginal Utility
b. Initial Utility d. Total Utility
10. Change in total utility is called
a. Marginal Utility c. Negative Utility
b. Positive Utility d. Zero utility

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (12) I.Com Part I

11. The term marginal in economics means

a. An additional unit c. Change in units
b. Last unit d. All of these
12. Marginal utility always
a. Increases c. Zero
b. Decreases d. Negative
13. Utility attained by all the units of a commodity consumed is called
a. Positive Utility c. Marginal Utility
b. Negative Utility d. Total Utility
14. When the use of commodity gives dissatisfaction it is called
a. Positive Utility c. Zero Utility
b. Negative utility d. Point of saturation
15. When desire of good is fully satisfied and consumer has no desire to consume further
units, it is called
a. Zero Utility c. Positive Utility
b. Point of saturation d. Both a & b
16. When no satisfaction is attained by the consumption of a commodity, its marginal utility is
a. Positive c. Zero
b. Negative d. None of these
17. When marginal utility is positive, total utility
a. Increases c. Does not change
b. Decreases d. Become negative
18. When marginal utility is zero, total utility
a. Increases c. Maximum
b. Decreases d. Become negative
19. When marginal utility is negative, total utility
a. Increases c. Maximum
b. Decreases d. Become negative
20. Total Utility is maximum when Marginal Utility is
a. Positive c. Zero
b. Negative d. None of these
21. Total Utility increases when Marginal Utility is
a. Positive c. Zero
b. Negative d. None of these
22. Total Utility decreases when Marginal utility is
a. Positive c. Zero
b. Negative d. None of these

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (13) I.Com Part I

23. According to which economists, utility is measureable

a. Adam Smith c. Robbins
b. Marshall d. Keynes
24. Cardinal utility approach was presented by
a. Adam Smith c. Robbins
b. Marshall d. Keynes
25. First law of consumption is known as
a. Law of DMU c. Law of Demand
b. Law of EMU d. Law of Supply
26. According to Law of Diminishing Marginal Utility, Marginal Utility of a commodity
a. Increases c. Remain constant
b. Decreases d. Become negative
27. On which of the following Law of Diminishing Marginal Utility is applicable
a. Money and wealth c. Goods in fashion
b. Normal goods of need d. Narcotics
28. Law of Diminishing Marginal Utility provides basis for
a. Law of Demand c. Law of Equi- Marginal Utility
b. Law of Supply d. Both a & b
29. Which law is applied when marginal utility of all the purchased goods become equal
a. Law of DMU c. Law of Demand
b. Law of EMU d. Law of Supply
30. Law of Equi-Marginal Utility is also Known as
a. Law of maximum satisfaction c. Law of indifference
b. Law of substitution d. All of these
31. Who said that utility cannot be measured
a. Adam Smith c. Robbins
b. Marshall d. Hicks
32. Consumer’s equilibrium takes place at that point where
a. MU is negative c. TU is maximum
b. MU is positive d. MU is maximum

Prof. Adnan Kanwal Punjab College Gujrat

Principles of Economics (14) I.Com Part I

Answers to Multiple Choice Questions:

1 All of these 9 Marginal Utility 17 Increases 25 Law of DMU
2 Self Respect 10 Marginal Utility 18 Maximum 26 Decreases
Normal goods of
3 Zero 11 All of these 19 Decreases 27
need
4 Directly 12 Decreases 20 Zero 28 Law of Demand
5 Utility 13 Total Utility 21 Positive 29 Law of EMU
6 Desire 14 Negative Utility 21 Negative 30 All of these
7 Initial Utility 15 Both a & b 23 Marshall 31 Hicks
8 Marginal Utility 16 Zero 24 Marshall 32 TU is maximum

Prof. Adnan Kanwal Punjab College Gujrat