1. Consumption
Meaning and importance, the utility
concept, marginal and total utility, the
law of diminishing utility and the law of
equi-marginal utility

2. Consumption
• The act of satisfying human wants is the simplest form of
consumption. When we consume something, it gets us some
satisfaction. The power of a good or service to satisfy human wants
is referred to as utility. It however does not necessarily mean
usefulness. In the case of some wants, like smoking and drinking,
the act of consumption may actually be harmful to human health.
But since the consumer gets some utility from such consumption, he
is ready to pay for it. Consumption is defined as an act of destroying
or reducing the utility of the good with the object of satisfying human
wants. A house destroyed by fire also destroys its utility but it is not
consumption. Consumption happens only with the satisfaction of a
human want. Consumption in in its broadest sense means the use
of economic goods and personal services in the satisfaction of
human wants.

3. Types of consumption
• The consumer by nature is a bundle of wants.
• All of these can not be satisfied because of their
scarcity and consumers limited income.
• Currently, another dimension has assumed
significance. It relates to concerns of high mass
consumption and the global warming debate.
• A consumer therefore has to optimize his
consumption under the constraints of limited
income and his preferences. This involves a
study of his satisfaction/utility and the budget
constraints

4. Understanding consumer’s
behavior
• The process of consumers decision making
involves the following factors:
• 1.His/her set of preferences
• 2.His constraints set in terms of income and
market prices
• 3. His/her optimal decision set from the feasible
set.
• There are two approaches available for this
optimization, namely,
• 1. Cardinal and, 2. Ordinal

5. Types of consumption
• 1. Perishable goods like tea, coffee, ice
cream vegetables, fruit, cigarettes,
chocolates …
• 2. Consumers durables like TVs, washing
machines, automobiles, houses

6. Cardinal approach: the law of
diminishing marginal utility
• In economics we prefer the term ‘utility’
over satisfaction/benefits as a measure of
what a consumer wants to optimize.
• The term was coined by Jeremy Bentham,
a British philosopher.
• The term ‘utility, refers to ranking order of
preferences.
• Utility can be understood as synonymous
to satisfaction.

7. The law of diminishing utility
• The law simply states that as our stock of
something scarce and capable of
satisfying a human want increases its
liking begins to diminish.
• In other words, the utility derived by the
consumption of a good or service
diminishes as we consume more and
more of it. It reaches even zero and can
become negative also.

8. The law of diminishing marginal
utility……..
• The law is subject to the following
assumptions:
• 1. The consumer is a rational person.
• 2. The unit of consumption is of specific
standard.
• 3. Consumption is simultaneous.
• 4. Utility is measurable objectively.

9. Exceptions to the law
• The law does not appear to apply in the
following cases:
• 1.Money
• 2.Adictions like drinking alcohol
• 3. Some hobbies like stamp and coin
collection

10. Utility maximization: the law of
equi-marginal utility
• Under cardinal utility analysis a consumer
maximizes his total utility by equalizing his
marginal utility in relation to price in all the
directions of his consumption or on each
good and service purchased by him.
• The principle of such maximization is
popularly referred to as the Law of equi-
marginal utility.

11. Utility maximization principles
• Optimization Rule 1:
When only one good is consumed
and is available for free, consume
till
MU x = 0

12. Utility maximization contd…
• Optimization Rule 2:
When only one good is consumed
and is available for a price:
Consume till MU x = Price x
• Optimization Rule 3:When more than one
good is consumed and the goods’ prices
are different:
Consume till MU x /P x = MU y /P y = MU z /P z

13. The law of equi-marginal utility
• Stated simply the law is as follows:
• MU of apples/price of apples = Mu of cups of tea/price of a tea cup
= Mu of an auto-mobile/price of the automobile = ……= Mu of good
‘n’/price of good ‘n’.
• This implies a comparison of marginal utilities (Mu) worth rupee one
of each of the goods a consumer is purchasing from his limited
income. This makes the comparison easy and meaningful.
• If mu is not equalized on all goods and services consumed, the
consumer is not maximizing his total utility. So he must reshuffle his
expenditure till the marginal utility of each rupee spent by a
consumer on all the goods and services purchased by him is equal.
Now the consumer has no incentive to reshuffle his expenditure as
he has attained maximum total utility from his expenditure.
• The above summary of the law has to be supported by tables and
diagrams presented during the course of class lectures.

14. Criticism of the laws
The laws of diminishing and equi marginal utility
suffer from the criticism that utility is subjective in
nature and can not therefore be measured
objectively.
Since it can not be measured objectively, it
becomes difficult to work-out the marginal
utilities of goods and services consumed by a
consumer, especially of their successive units of
consumption. However, the essence of the law
remains quite valid.
This is why we need to resort to ordinal utility
analysis to prove the validity of these laws.