Fundamentals of the theory of consumer behavior

Lecture 6. Marginal utility theory and consumer behavior

Consumer behavior is the process of generating consumer demand for a variety of goods and services. Consumer behavior is always determined by people’s income, which is distributed in accordance with personal ideas about the maximum utility and profitability of the purchased goods.

The theory of consumer behavior and demand studies a set of interrelated principles and patterns, guided by which an individual forms and implements his plan for the consumption of various goods, while focusing on the most complete satisfaction of his needs. The main postulate of the theory is that consumers strive maximize the utility or satisfaction derived from spending a fixed income. There are two approaches to assessing consumer behavior:

Ø the quantitative (cardinalist) approach is based on the idea of the possibility of measuring the utility of various goods in hypothetical units (utilities, from the English Utility);

Ø the ordinal (ordinal) approach is based on the same theoretical basis as the quantitative one, but is based on less stringent premises. In this approach, the consumer is only required to distribute bundles of goods according to degree of preference.

Needs are the internal winning motives of human activity. At any given moment in time, a person strives to satisfy those needs that are most important to him, that is, the satisfaction of which will bring the greatest utility.

Utility of good is the ability of an economic good to satisfy human needs.

Economic goods are goods in which there is a certain shortage, that is, there is not enough of them for everyone.

Depending on their utility, goods are divided into goods with additional utility and anti-goods.

Goods with additional utility (goods) are goods, an increase in the volume of which is attractive to a person (rest, clothing).

Anti-benefits (bads) are benefits, the increase of which is undesirable for humans (presence of CO 2 in the air, etc.).

The utility function is the relationship between the volumes of goods and services that are consumed and the level of utility received by the consumer.

The utility function can be given as

U = f (Q x , Q y , … Q n), (6.1)

where U is utility;

Q x , Q y , … Q n – the number of corresponding goods x, y, … n consumed over a certain period.

Total utility is the overall pleasure that a consumer receives from the goods or services he consumes. Total utility increases during consumption, but it increases at a slower and slower pace (Fig. 6.1.a).

Marginal Utility is the increase in utility from the consumption of each additional unit of a good or service (Fig. 6.1.b).

Definition of good

Means that satisfy needs are called goods. Some of them are available in unlimited quantities, others in limited quantities. The latter are called economic benefits. They consist of things and services.

All economic benefits can be divided into long-term ones, involving multiple use (car, book, electrical appliances, etc.). And short-term ones, disappearing during one-time consumption (bread, meat, drinks, matches, and so on). Among the benefits, there are complementary (complementary) and interchangeable (substitutes).

According to Marx's theory, the cost (value) of an economic good is determined by the costs of socially necessary labor, that is, labor performed under average socially normal conditions of production and average labor intensity. According to neoclassical views, the value of goods depends on their rarity, primarily on the intensity of the need and the amount of goods that can satisfy this need. It is assumed that any need can be satisfied by several goods, and any economic benefit can be used to satisfy several different needs. To obtain missing consumer benefits, as a rule, indirect economic benefits - resources are needed.

Utility of a good

The utility of a good is the ability of an economic good to satisfy one or more human needs. As a result of research in the nineteenth century, a pattern was revealed: parts of a good consumed sequentially have diminishing utility for the consumer. It is assumed that consumer tastes are constant, and the consumption function is continuous (and, therefore, differentiable at each point). It can be noted that although total utility (TU) gradually increases with increasing quantity of goods, marginal utility (MU) of each additional unit of good steadily decreases.

Further consumption causes harm, then the overall utility decreases. The more good we have, the less value each additional unit of this good has for us. Thus, the price of a good is determined not by the total, but by the marginal utility for the consumer.

Topic No. 8. The theory of consumer choice.

8.1. Utility of a good and consumer choice (cardinalist theory).

8.2. Indifference curves and budget constraints.

8.3. Consumer optimum. Internal and corner solutions.

8.4. Income effect and substitution effect.

8.5. Income-consumption line and Engel curves.

8.6. Price-consumption line. Constructing an individual and market demand curve.

8.1. Utility of a good and consumer choice (cardinalist theory).

Consumer behavior depends on many factors. The main factor in cardinalist concept consider usefulness.

Utility is the satisfaction that a person receives from consuming any good.

There is a distinction between total and marginal utility:

Overall usefulness (total utility) is the total utility of all consumed goods.

Marginal utility (marginal utility) is the increase in total utility when the volume of consumption of a given good increases by 1 unit: .

Can utility be measured? Cardinalists proceed from the fact that utility can be measured in absolute units; a special unit of utility is introduced - the util.

The ordinal concept proposes a relative measurement (product A is better than product B - A>B, product A is worse than product B - A

The fundamentals of the cardinalist concept are:

1. Demand is determined by utility

2. Utility has an absolute dimension.

Let's consider the properties of total and marginal utility.

Total utility increases as the quantity of consumer goods increases. Graphically it looks like this:

An increase in the quantity of a good consumed increases the measure of saturation, so each additional unit of good brings less and less utility compared to the previous one. Marginal utility is inversely proportional to the amount of goods consumed. Law of Diminishing Marginal Utility : If the consumption of all other goods is constant (other things being equal), then the marginal utility of a given good will decrease as consumption increases.

For most goods, this law begins to operate from the second unit of the good. There are exceptions to this rule, but still, starting from a certain unit, this law holds true.

Because As marginal utility decreases, increasing purchases brings less and less satisfaction. Consequently, he will increase consumption only if the price for additional units of the good decreases. Therefore, the marginal utility curve, like the demand curve, has a negative slope and the same configuration.

To apply the concept of marginal utility to demand research, the following assumptions must be made:

1. Ordering of preferences consumer, i.e. preferences have already been formed, for each specific product A and B the consumer can state: A>B, A

2. Transitivity preferences. This assumption concerns the logic of preferences: if A>B and B>C, then A>C.

3. Availability of necessary awareness about the market situation.

4. Unsaturation needs, i.e. the more the better: A+1>A.

5. Each consumer is exclusively rational(the greatest effect at the lowest cost) and by purchasing goods strives to increase the overall utility of the goods consumed. This is only achievable if you comply rules for maximizing total (integral) utility : the consumer achieves maximum satisfaction if the marginal utilities of the purchased goods per monetary unit are the same.

Let's consider a specific example.

Let the budget be 350 rubles. The price of product A is 50 rubles, the price of product B is 100 rubles. Let's create a table of marginal utility:

Quantity of goods, pcs.	Product A (price – 50 rub.)		Product B (price – 100 rub.)
Quantity of goods, pcs.		MU for 1 rub.		MU for 1 ruble

Equal utility per ruble prices for goods A and B are 0.06, which means the optimal combination is 3 units. product A and 2 units of product B.

Consumer choice is the choice that maximizes marginal utility per unit price given limited income.

Cardinalist theory formulates the rule for maximizing total utility:

The utility function is maximized when the ratio of the utility of a good to its price is the same for all consumed goods:

Along with the general principles of choosing a rational consumer, there are features that form 3 typical cases of consumer behavior:

1. The effect of joining the majority (the consumer, trying to keep up with others, buys what others buy; this means that the consumer depends on the opinions of others, and this dependence is direct).

2. Snob effect (the consumer has a desire to stand out from the crowd, dependence on the choices of others is the opposite).

3. Veblen effect (described by Veblen in the “theory of the leisure class”) (goods and services are used not for their intended purpose, but to make a lasting impression on others).

Utility is the goal of consumption, but there are a number of restrictions that prevent a person from consuming everything he wants. Utility is a designation of the pleasure or satisfaction that a person receives from consuming a certain product or service.

There are two approaches to determining utility:

1. Quantitative (cardinalist) approach;

2. Ordinal (ordinal) approach.

Quantitative approach

Authors: Javis, Menger, Walras. It is believed that the consumer always makes decisions of an incremental nature (buy more than he had, etc.). A pattern has been identified: parts of a particular good consumed sequentially have diminishing utility. That is, the more good we have, the less value each additional unit of this good has for us. For example, in the heat you drink the first glass of kvass, then the second, and then leave the third unfinished. Accordingly, the usefulness of kvass in the third case has decreased for you to a minimum (zero). Concepts introduced:

1. Marginal utility (MU) is the utility that a consumer derives from an additional unit of good. As an additional unit of a good is consumed, marginal utility falls.

2. Total utility (TU) – is the satisfaction obtained as a result of consuming the total amount of a good over a certain period of time. As an additional unit of a good is consumed, total utility increases.

From the example:

Graphically:

M.U.

T.U.

1 2 3

Fig.25. Graphical representation of marginal and total utility

MU = dTU (13)

Law of Diminishing Marginal Utility: As the quantity of a good consumed increases, the degree of saturation of needs increases, and the increase in utility with each new unit of good decreases. Therefore, each subsequent consumed unit of a good has m e lower marginal utility than the previous one.

Maximum utility satisfaction ( TU max) will be at the point where marginal utility is zero.

MU = dTU = 0

Thus, reasonable consumer choice involves making a choice that maximizes utility under conditions of limited resources (money income).

Gossen's Law(or Optimal consumer choice ) is to maximize the utility function of a rational consumer under conditions of limited resources. The utility function is maximized when money income is completely distributed in such a way that each additional ruble spent on the acquisition of any good brings the same marginal utility:

M.U.λ = (14)

or MU 1 = MU 2= …= MU n = λ

Р 1 Р 2 Р n

where λ is the marginal utility of money.

It follows from the law that the marginal utility of a good equals the marginal cost of the consumer (MV=MS).

Indifference curves

Graphically, consumer preferences can be shown using indifference curves – a curve showing different combinations of two economic goods that have the same utility for the consumer; a curve showing alternative bundles of goods that provide the same level of utility. For example,

Graphically:

Fig.26. Indifference curves

where A ~ B ~ C (~ - equal overall satisfaction).

A set of indifference curves for one consumer and one pair of goods forms indifference card .

Fig.27. Indifference Map

The configuration of the indifference curve is determined marginal rate of substitution (MRS) – shows the amount by which the consumption of one of two goods must be increased (decreased) in order to fully compensate the consumer for the decrease or increase in consumption of the other good by one additional unit.

Δy = 1.5

Δx = 1

Fig.28. Configuration of the indifference curve depending on MRS

MRS = - ΔQy=MUx = Px=- Δy (15)

ΔQx MUy Py Δx

Budget constraint

The choice of the consumer depends not only on his preferences, but primarily on his income and the level of prices for goods.

Budget constraint (budget line) is a line showing which sets of consumer goods can be purchased for a certain amount of money. Budget line equation:

Qy = - Px∙Qx+ I (16)

Qy – quantity of purchased product y.

Qx - quantity of purchased product x.

Px, Py – purchase prices of goods x and y.

I – consumer income (budget constraint).

I = Px ∙ Qx + Py ∙ Qy(17)

The budget line equation can also be written as:

Y= I- Px∙X (18)

Where X, Y quantity of purchased goods X and Y

I/ Py– indicates the point where the budget line intersects the Y axis

Px/py- the angular coefficient of the budget line determines the slope of this straight line to the X axis.

The budget constraint for two goods can be expressed by the formula:

I = P 1 x 1 + P 2 x 2(19)

P 1 - price of good x 1;

P 2 - price of good x 2.

Cloth

WITH

I Px

I Ru

Nutrition

- Px Py

Fig.33. Budget Constraint Line

Where, points A, B, C – possible sets of consumer goods.

Point K– point of underutilization of personal income

Point L– the set will not be available to the consumer due to the limitations of his budget – the point of borrowing money.

Consumer equilibrium

In order to determine how many goods a rational consumer purchases within his monetary income, it is necessary to compare the utility maximization function with the budget constraint. Consumer equilibrium is a combination of certain goods that maximizes utility given the consumer's existing income (subject to a budget constraint).

MU x = MU n= …= MU n

Р x Р y Р n

I = P x ∙ Q x + P y ∙ Q y

Graphically, the state of equilibrium is achieved at the point where the budget line coincides tangentially with the indifference curve.

Fig.36. Engel curve

Valuable (high quality goods)– goods for which demand increases sharply with rising income (luxury goods). Ordinary (standard consumer quality goods)- goods for which demand initially increases slightly as income increases, and as income further increases, it stabilizes at a constant level. Low value (inferior)– goods for which demand decreases as income increases and increases when income decreases. First of all, there is a saturation with food products, then with industrial goods of standard quality. And only later – with high-quality goods.

Price-consumption curve

In real life, a consumer's income may be constant, but the price of goods may rise.

Fig.37. Price-consumption curve

Needs are satisfied through the consumption of various goods. Good is everything that satisfies a need. The ability of a good to satisfy a need characterizes its usefulness. The usefulness of a good is thereby manifested through consumption.

The utility of the same good may vary depending on the degree to which a given need is satisfied.

In this regard, along with the general concept of “utility,” there is the concept of “marginal utility.” Marginal utility is the utility of an additionally consumed good. If by good we mean a glass of water, then the ultimate utility can be the first glass, with the help of which the thirst is quenched. If one glass was not enough to satisfy the need and another glass is drunk, then the utility of the second glass will be marginal.

Since marginal utility reflects the degree of satisfaction of the corresponding need, it is characterized by a decrease as an additional unit of good is consumed. Thus, the usefulness of the first glass of water, which quenches the thirst of the summer, is relatively high.

volume. The utility of the second glass of exactly the same water will be less, the third - even less, the utility of the fourth may be zero, and the fifth - negative. This persistent and recurring trend is characterized as the law of diminishing marginal utility. It should be remembered that the law of diminishing marginal utility reflects the connection between a particular good and the need that this good must satisfy.

A huge variety of needs is satisfied through total utility, which is understood as the utility of the total supply of consumed goods.

Taking into account marginal utility gives grounds to assert that the total utility of a stock of various goods depends not only on the number of individual goods forming the stock, but also on the assortment, i.e. composition and types of goods in this stock. For example, the utility of two food stocks with the same calorie content may be different if their range is different.

The utility of many goods can be similar, and therefore there is the possibility of mutual substitution of some goods with others. If a good, for example, margarine, can replace another (butter), then such a good appears as a substitute, that is, a substitute good.

There are also complementary - complementary benefits. Their usefulness is ensured when used together. For example, the usefulness of a car is fully manifested in the presence of gasoline, a tape recorder requires cassettes, a table requires a chair, etc.

The entire set of goods necessary for people can be divided into two types: free and economic goods.

Free benefits include those that nature itself gives people directly and directly. People consume them by virtue of their existence. Many of the free goods enter the process of production and consumption without restrictions. These, for example, are atmospheric air, sunlight, heat, and many atmospheric and cosmic phenomena that are useful to people.

Economic benefits are the result of production as the economic activity of people and appear in the form of a product. In order to have and consume such goods, they must be produced. Because of this, economic goods (or products) are limited, which makes the economy particularly important as a system for satisfying people's needs.

In turn, economic benefits are divided into tangible and intangible.

Material goods are things that can satisfy a particular need. The peculiarity of material goods is that they contain natural material, they can be used, stored, and after consumption they turn into waste.

The ability of material goods to be stored, accumulated, and consumed in a special way allows them to be divided into current and capital.

Current ones include things whose usefulness is used for a relatively short time, sometimes a few minutes: you can quickly drink a bottle of lemonade, eat a cutlet or a pie. Current reusable goods, such as clothing and shoes, are used for a longer period of time.

Capital goods include buildings, structures, equipment, machines - everything that lasts for years, tens, and sometimes hundreds of years.

Intangible benefits include services that represent the actions of people to satisfy certain types of personal and production needs. The peculiarity of services is that they cannot be stored, transported, or stored for future use; their production and consumption coincides in time, such as, for example, a lecture by a teacher in a student audience. It is important to keep in mind that the provision of services is possible with the availability of appropriate material goods. The same lecture, for example, requires an audience, tables, chairs, etc.

Taking into account the ability of goods to satisfy personal and production needs, they are divided into consumer and industrial goods.

Consumer goods include consumer goods and personal services. Some of them can be consumed individually (food, clothing, shoes, etc.), others - collectively or jointly, as is the case with theater and cinema services.

Production goods include the means of production and services necessary for the production of consumer goods, other means of production and services. These are industrial buildings, structures, equipment, freight transport services, etc.

The need and usefulness of goods. Total and marginal utility of a good. Usefulness and price Review questions

Definition of good

Utility of a good

8.1. Utility of a good and consumer choice (cardinalist theory).

More on topic 2.3. Benefits, their usefulness and types: