Consumer Behavior

Learning Objective: Apply utility theory to explain consumer choices

Picture this: you are very thirsty after a long walk in Kathmandu's heat and you buy a glass of sugarcane juice for Rs. 30. That first glass tastes amazing and gives you immense satisfaction. You buy a second glass -- still good, but not as satisfying as the first. By the third glass, you barely want it. This experience perfectly illustrates the economic concept of utility and how it shapes consumer behavior.

What Is Utility?

Utility is the satisfaction or pleasure a consumer gets from consuming a good or service. It is a subjective measure -- different people get different levels of utility from the same product.

• Total Utility (TU): The total satisfaction from consuming all units of a good.
• Marginal Utility (MU): The additional satisfaction gained from consuming one more unit.

Formula: MU = Change in Total Utility / Change in Quantity

Law of Diminishing Marginal Utility

This law states that as a person consumes more units of a good, the marginal utility decreases with each additional unit, all other things being equal.

Example: Eating momos in Kathmandu

| Plates of Momos | Total Utility (utils) | Marginal Utility (utils) | |---|---|---| | 1st | 50 | 50 | | 2nd | 85 | 35 | | 3rd | 105 | 20 | | 4th | 110 | 5 | | 5th | 105 | -5 (dissatisfaction!) |

Notice how the marginal utility decreases from 50 to 35 to 20 to 5. By the 5th plate, the consumer actually feels worse (negative MU) -- they have eaten too much!

Key Insight: A rational consumer will stop consuming when MU reaches zero or becomes negative.

Consumer Equilibrium

A consumer with limited income must decide how to allocate spending across different goods. The consumer reaches equilibrium (maximum satisfaction) when:

MU of Good A / Price of A = MU of Good B / Price of B

This means the last rupee spent on each good should give equal marginal utility.

Example: Priya has Rs. 100 to spend. A plate of momos costs Rs. 50 and a cup of tea costs Rs. 25.

• If MU of momos = 40 utils and MU of tea = 20 utils
• MU per rupee of momos = 40/50 = 0.8
• MU per rupee of tea = 20/25 = 0.8
• The ratios are equal, so Priya is in equilibrium -- she is maximizing her satisfaction.

Consumer Surplus

Consumer surplus is the difference between what a consumer is willing to pay and what they actually pay.

Example: You are willing to pay Rs. 200 for a concert ticket in Kathmandu, but the ticket costs only Rs. 150. Your consumer surplus is Rs. 50 -- you feel you got a "bargain."

Key Term: Marginal Utility is the extra satisfaction gained from consuming one additional unit of a good. It typically decreases with each successive unit consumed.

Summary

• Utility measures consumer satisfaction; it can be total or marginal.
• The Law of Diminishing Marginal Utility explains why each extra unit gives less satisfaction.
• Consumer equilibrium is reached when the marginal utility per rupee is equal across all goods.
• Consumer surplus is the extra benefit consumers enjoy when they pay less than their maximum willingness to pay.