Some aspects of theory of consumer behavior

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1. Characteristics of wants

1. The existence of human wants is the basis of all economic activity in a society. All desires, tastes and motives of human beings are called wants in economics.

1. Wants may arise due to elementary and psychological causes. The wants for food, clothing and housing are elementary and psychological.

2. Wants may arise due to social causes. As members of society, we may require a particular type of dress and food.

3. Wants arise due to customs and habits like drinking tea and chewing.

4. Wants may arise due to advertisements.

In the early stages of civilisation, wants of men were few and simple. With advancement of civilisation, wants have become unlimited and also complex. Man tries to satisfy most of his wants through economic activity. Since the resources are limited, he has to choose between urgent wants and not so urgent wants. A systematic survey of this process is called consumption. Consumption means using up of goods and services in the satisfaction of human wants. The economics of consumption is related to a study of nature of wants and the behaviour of demand.

5. Wants are unlimited: Man is a bundle of desires. There is no limit to human wants. If one set of wants are fulfilled, immediately another set of wants would be felt. Even the richest man will have a list of wants to be fulfilled.

6. Every want is satiable: wants in general are unlimited. But a single or a particular want is satiable. We can completely satisfy a single want. A man is hungry and he requires food. By spending some money on food, he can get food and satisfy his hunger.

7. Wants are competitive: Wants are unlimited. The resources and time at our disposal are much limited and we cannot satisfy all wants. So the wants will be competing to get satisfied. One set of wants may be competing with other set of wants to get preference of choosing first. Of course, a consumer will choose the more urgent wants and distribute his income on several goods in such a manner as to get maximum satisfaction.

8. Wants are complementary: Some wants are complementary in nature, i.e. they have to be satisfied together. Though the want may be a single one, we require many commodities and services to satisfy that want. Want for `writing' includes want for paper, pen and ink. In some cases, wants may be both `competitive' and `complementary'. For example, labour and machinery. Labour can be displaced by machinery. Machines cannot work without the help of labour.

9. Wants are alternative: A want can be satisfied by two or more goods or by two or more methods. A want for hot drink may be satisfied by coffee or tea. We may go by `bus' or `train' or by `taxi' to reach our destination. Thus, a want can be satisfied by many ways. These alternative goods or methods are called `substitutes'.

10. Wants vary with time, place and person: Wants are not static in character. They are changing with time, place and person. We require hot drinks in winter and cool drinks in summer. People of England require warm woollen suits and rain coats. People of India require only cotton. The wants of a villager are different from a business magnet. The wants of our forefathers were different from the wants of the present generation. So, wants vary with generation, culture, society, geographic location and the extent of economic development.

11. Some wants recur again: Some wants are felt again and again. The want for food can be satisfied by eating food. Again the same want appear after a few hours. That is why we say wants are recurring in nature.

12. Wants are influenced by advertisements: Effective advertisements through films, journals, radio and TV will create new wants and the existing wants get modified. Through advertisements and clever salesmanship, businessmen create tastes for their products.

13. Wants become habits and customs. If a particular want is satisfied repeatedly by a commodity, then it becomes a habit. Example: drinking coffee and tea. Wants become habits and habits are responsible for wants.

Classification of wants. In Economics, wants are classified into three categories: necessaries, comforts and luxuries.

1) Necessaries are those which are essential for living. Man requires certain basic things to live. He wants food, clothing and shelter. Without these things, life is impossible.

2) Comforts refer to those goods and services, which are not essential for living but which are required for a happy living. A TV, a sofa-cum- bed, a cushioned revolving chair may be stated under `comforts'. Eating superior varieties of food may also add to the happiness of the consumer. Example: eating fruits, drinking milk etc. Comforts promote efficiency also.

3) Luxuries are used to show off one's higher status in life (e.g. diamond - studded jewels) are luxuries.

The classification of goods and services into necessaries, comforts and luxuries are only relative in their concept. They are not absolute concepts. What is `comfort', to one may be a `necessity' to another and a `luxury' to a third man. A motorcar is necessary for a businessman and a doctor. It is a luxury for a student. What is necessary for a man in town may be a luxury for a villager. These classifications depend on the

2. Concept of Utility

economic customer marginal

In the ordinary language, `utility' means `usefulness'. In Economics, utility is defined as the power of a commodity or a service to satisfy a human want.

Utility is a subjective or psychological concept. The same commodity or service gives different utilities to different people. For a vegetarian, mutton has no utility. Warm clothes have little utility for the people in hot countries. So utility depends on the consumer and his need for the commodity.

Total utility refers to the sum of utilities of all units of a commodity consumed. For example, if a consumer consumes ten biscuits, then the total utility is the sum of satisfaction of consuming all the ten biscuits.

Marginal utility is the addition made to the total utility by consuming one more unit of a commodity. For example, if a consumer consumes 10 biscuits, the marginal utility is the utility derived from the 10th unit. It is nothing but the total utility of 10 biscuits minus the total utility of 9 biscuits.

Thus:

MUn = TUn -TUn-1,

MUn - marginal utility of `nth' commodity. TUn - total utility of n units. TU n-1- total utility of n-1 units.

3. The law of diminishing marginal utility

Explains an ordinary experience of a consumer. If a consumer takes more and more units of a commodity, the additional utility he derives from an extra unit of the commodity goes on falling. Thus, according to this law, the marginal utility decreases with the increase in the consumption of a commodity. When marginal utility decreases, the total utility increases at a diminishing rate.

Gossen, Bentham, Jevons, Karl Menger contributed initially for the development of these ideas. But Alfred Marshall perfected these ideas and made it as a law. This law is also known as Gossen's I law.

According to Marshall, “The additional benefit which a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has”.

Assumptions of the law:

1. The units of consumption must be in standard units e.g., a cup of tea, a bottle of cool drink etc.

2. All the units of the commodity must be identical in all aspects like taste, quality, colour and size.

3. The law holds good only when the process of consumption continues without any time gap.

4. The consumer's taste, habit or preference must remain the same.

5. The income of the consumer remains constant.

6. The prices of the commodity consumed and its substitutes are constant.

7. The consumer is assumed to be a rational economic man. As a rational consumer, he wants to maximise the total utility.

8. Utility is measurable.

Explanation. Suppose Mr X is hungry and eats apple one by one. The first apple gives him great pleasure (higher utility) as he is hungry; when he takes the second apple, the extent of his hunger will reduce. Therefore he will derive less utility from the second apple. If he continues to take additional apples, the utility derived from the third apple will be less than that of the second one. In this way, the additional utility (marginal utility) from the extra units will go on decreasing. If the consumer continues to take more apples, marginal utility falls to zero and then becomes negative.

Table 1. Total and marginal utility schedule.

Fig. 1

Table 1 gives the utility derived by a person from successive units of consumption of apples. From Table 1 and figure 1 it is very clear that the marginal utility (addition made to the total utility) goes on declining. The consumer derives 20 units of utility from the first apple he consumes. When he consumes the apples continuously, the marginal utility falls to 5 units for the fourth apple and becomes zero for the fifth apple. The marginal utilities are negative for the 6th and 7th apples. Thus when the consumer consumes a commodity continuously, the marginal utility declines, reaches zero and then becomes negative.

The total utility (sum of utilities of all the units consumed) goes on increasing and after a certain stage begins to decline. When the marginal utility declines and it is greater than zero, the total utility increases. For the first four units of apple, the total utility increases from 20 units to 50 units. When the marginal utility is zero (5th apple), the total utility is constant (50 units) and reaches the maximum. When the marginal utility becomes negative (6th and 7th units), the total utility declines from 50 units to 45 and then to 35 units.

The law of diminishing marginal utility (DMU) is the foundation for various other economic laws. For example, the law of demand is the result of the operation of the law of diminishing marginal utility. In other words, as more and more units of a commodity are consumed, each of them gives less and less marginal utility. This is due to the operation of the law of DMU. As utility falls, consumer is therefore willing to pay a lower price only.

The law of DMU operates in the case of money also. A rich man already possesses a lot of money. If more and more money is newly added to his income, marginal utility of money begins to fall. Alfred Marshall assumed that the marginal utility of money remains constant.

This law is a handy tool for the Finance Minister for increasing tax rate on the rich.

Producers are guided by the operation the law of DMU, unconsciously. They constantly change the design, the package of their goods so that the goods become more attractive to the consumers and they appear as `new goods'. Or else, the consumers would think that they are using the same commodity, over and over. In such a situation, the law of DMU operates in the minds of the consumers. Demand for such commodities may fall.

The law of DMU is criticised on the following grounds.

1) Deriving utility is a psychological experience, when we say a unit of X gives ten units of utility, this means that utility can be measured precisely. In reality, utility cannot be measured. For example, when a person sees a film and says it is very good, we cannot measure the utility he has derived from it. However, we can measure utility indirectly by the cinema fare he is willing to pay.

2) The law is based on a single commodity consumption mode. That is, a consumer consumes only one good at a time. This is an unrealistic assumption. In real life, a consumer consumes more than one good at a time.

3) According to the Law, a consumer should consume successive units of the same good continuously. In real life it is not so.

4) The law assumes constancy of the marginal utility of money. This means the marginal utility of money remains constant, even when money stock changes. In real life, the marginal utility derived from the consumption of a good cannot be measured precisely in monetary terms.

5) As utility itself is capable of varying from person to person, marginal utility derived from the consumption of a good cannot be measured precisely.

4. The law of equi-marginal utility. The idea of equi-marginal principle was first mentioned by H.H. Gossen (1810-1858) of Germany. Hence it is called Gossen's second Law. Alfred Marshall made significant refinements of this law in his `Principles of Economics'.

The law of equi-marginal utility explains the behaviour of a consumer when he consumers more than one commodity. Wants are unlimited but the income which is available to the consumers to satisfy all his wants is limited. This law explains how the consumer spends his limited income on various commodities to get maximum satisfaction. The law of equi-marginal utility is also known as the law of substitution or the law of maximum satisfaction or the principle of proportionality between prices and marginal utility.

In the words of Prof. Marshall, “If a person has a thing which can be put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all”.

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