Theory of Consumer Behaviour

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Study session 4 Theory of Consumer Behaviour: Cardinal utility Analysis Introduction This study session will lay the foundation for the discussion of the concept of utility. It will discuss the meaning of utility and other derivatives. It will also identify the set of assumptions on which the cardinal analysis rests.It will further expose you to the concepts of consumer equilibrium and the conditions under which a consumer can be said to be at equilibrium. Learning outcomes At the end of this study session, you should be able to: 4.1 4.2 4.3 4.4 4.5 4.6 Define and use correctly the key words printed in bold Define utility, total utility, marginal utility and diminishing marginal utility. Explain the measurment of utility Explain the relationship between total utility and marginal utility List the assumptions of cardinal utility analysis Explain the concept of consumer equilibrium and conditions 4.1 Definitions of utility The cardinal utility analysis which can also be refered to as a neo – classical utility analysis refers to the theory of consumer demand as developed by Marshal, Pigou and others (Jhingan, 2005). The theory is based on cardinal measurement of utility and its analysis rests on certain assumptions which will be discussed shortly. Umo (1986) defines utility as the want, satisfying power, that any commodity has Lipsey (1985), on the other hand defines utility as the satisfaction a household receives from consuming commodities. Jhingan (2005) notes that the word utility denotes the want satisfying power of a commodity or service. In general, utility can be described as the satisfaction, benefits, pleasure, enjoyment derived as a result of consumming a product or service. The concept of utility does not consider the morality behind the use of a product or service. For example, a product may be inconsequential, trivial, frivolous, injuriuos or even

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