Term of customer utility total and marginal

During its life the consumer must satisfy the hunger, thirst, needs for clothing,
that is to satisfy a wide variety of their needs. It is known that almost unquenchable
human needs, as always, there are limitations to their full satisfaction, for example,
limited consumer income. But despite this, the consumer is aimed at meeting their
needs, getting the maximum utility from the purchased goods and services it,
focusing on the available income, personal preferences, taking into account the
prices of those goods or services. irms seeks way to maximi!e profits in the
course of economic activity, taking into account the demand for products created
by them, the prices of inputs.
"ence the need for a cost#effective choice that is $effective use of limited
resources or production management in order to achieve maximum satisfaction of
material needs.%
The Utility Function
&conomic analysis of consumer behavior begins with a utility function. This
function defines what determines the consumer's level of well#being, however that
term may be construed. The analyst typically does not specify a functional form for
the utility function, except for purposes of illustration. In general, the utility
function may be written as follows(
) * f+,
-
, ,
.
, /, ,
0
1 2
-
, 2
.
, /, 2
3
4.
In this equation, ) is a measure of 5utility% and ,'s and 2's are goods or
services +5goods% hereafter4. 6e may specify two classes of goods, 5material%
goods, the , goods, +bread, butter, clothing, entertainment4 and 5spiritual% goods,
the 2 goods, +love of one's family, love of one's 7od, love of one's country4.
&conomics focuses primarily, though not exclusively, on the , goods.
Characteristics of a Utility Function
In general, an acceptable utility function must satisfy three conditions( it
must be complete +that is, a utility level must be attached to every combination of
goods and services that the consumer can en8oy4, it must depict consistent
behavior, and it must satisfy a transitivity condition. In addition, we commonly add
an assumption that for all goods more is preferred to less.
-. Completeness. The consumer must be able to compare any possible
combination of ,'s and 2's, assigning a value of ) to each. The value of )
need not be measurable by any analyst, but the consumer must be able to
invariably discern between less#preferred and more#preferred combinations of
goods. 6e will refer to each such combination as a 5basket% of goods.
.. Consistency. This assumption insures that thought experiments can be carried
out. The consumer's utility function +often referred to as preferences4 is
constant throughout the experiment +price change, income change, etc.4
6himsical behavior is not allowed in the model.
9. Transitivity. If the consumer 8udges basket : better than basket B, and the
consumer 8udges basket B better than basket ;, then the consumer must 8udge
basket : better than basket ;. This condition is a sine qua non for rational
behavior.
<. More is preferred to less. This assumption assumes that the consumer cannot
get so much of any good that the good becomes a 5bad.% or any given levels of
,
.
, ,
9
, /, ,
0
and the =s, having more of ,
-
makes the consumer better off
+results in a higher utility level4. This assumption can be relaxed for some
goods without changing the model's results. The rational consumer who can
choose how much of each , to consume will simply never consume so much of
any good that the additional units become obnoxious. If the good is obnoxious
from the beginning>say air pollution>then we rename the good 5air pollution
abatement.%
Depicting the Utility Function
To illustrate the concept of the utility function, we employ a model in which
utility is a function of two goods, , and =. This representation has obvious
advantages for the purpose of graphing. :s it turns out, most of the important
principles of consumer behavior can be developed within this relatively simple
framework.
Because a negative number raised to a power does not yield a real value, )
cannot be defined until the consumer has 8ust over five units of =. Think of five
units of = as being necessary for survival. 6e will note where the functional form
is more restrictive than is required by the four conditions stated above.
igure - shows how utility depends on the levels of , and =. Two aspects of
the 5utility hill% depicted in the figure are apparent. irst, utility increases with the
increased consumption of either , or =, given values of the other. The other is that
the rate at which utility increases becomes smaller as we move along the 5hill% in
either direction. This utility function exhibits diminishing marginal utility( as the
amount of one good increases, holding constant the other good, the additions to
utility decrease.
Figure 1 Utility Function
igure . shows this relationship more clearly. In igure ., the level of good
= is held constant at = * -? so that utility becomes a function of , alone. :s ,
increases, so does utility but at an ever#decreasing rate. This characteristic of
diminishing marginal utility is not imposed by theory. :ny function like this one
would yield the same behavior pattern as the one employed(
) * ,
?.@
=
?.9
,
6here +lambda4 and +mu4 are positive numbers. If A . in this example, the
slope of the curve in igure . would increase as , increases, holding = constant.
6e select exponent values below unity, not because theory dictates that this be so,
but because diminishing marginal returns seem plausible.
Figure 2 Utility as a Function of One Good
Indifference Curves
: striking feature of the surface area of the 5utility hill% in igure - is the
hori!ontal bands that cross it. &ach of the bands corresponds to a range of utility
values. : more common and more useful representation of such bands are
5indifference curves.% These are 5iso#utility% curves, curves consisting of ,, =
pairs that yield the same level of utility. igure 9 shows each such curves. &ach of
these curves corresponds to a line drawn around the 5utility hill% and then
pro8ected downward onto the ,, = surface.
Figure 3 Indifference Curves
:n indifference curve illustrates one of the important aspects of economics,
substitution. The height of the indifference curve at any given point indicates how
many units of 7ood = this person is willing to give up to get an additional unit of
7ood ,, because changing baskets does not change the consumer's utility level.
This slope is often called the marginal rate of substitution. This utility function,
like most, exhibits a diminishing marginal rate of substitution( If the consumer has
more units of , and less of =, the consumer is willing to give up fewer additional
units of = in order to receive an additional unit of ,. +:t the lower levels of utility,
by the time the consumer gets .? or so units of ,, the amount of = heBshe is
willing to give up for more , is virtually !ero.4
The phenomenon of a diminishing rate of marginal substitution can be
related to the concept of diminishing marginal utility. :t any point on the
indifference curve, the marginal rate of substitution +3C24 is the ratio of the
marginal utilities of the two goods(
3C2 * 3)
,
B3)
=
.
: diminishing rate of marginal substitution does not require diminishing
marginal utility for either good, only that the ratio of the two decrease as the
consumer moves to the southeast along an indifference curve +consuming more ,
and less =4.
It is constructive to see how the four curves in igure 9 were created in
Excel. The following pairs of , and = were specified and the resulting utility
levels computed, using &quation.
Table 1 ! "! and Utility
0ext, the levels of = required to yield each of the four utility levels were
determined using this relationship(
= * )
<
B,
.

The four values of ) from the table above yield four distinct indifference curves.
Dne of the pairs +E,-?4 is represented in igure 9. The graph reflects the 5more is
better% requirement in a direct fashion. :ll points to the southwest of +E,-E4
necessarily lie on lower indifference curves1 all points to the northeast necessarily
lie on higher indifference curves. To determine whether points to the northwest or
southeast of +E,-?4 requires more information, the sort that the specific utility
function provides.
#udget Constraints and Constrained $a%i&i'ation
)tility is 8ust half of the story. &very consumer faces one or more constraints
on which baskets are available for consumption. 3ost apparently, money income is
limited. In addition, time is limited. Fabor economics textbooks often incorporate
the time constraint as well when discussing choices between leisure and goods and
services purchased in markets.
The #udget Constraint
The consumer behavior model developed here employs the following
assumptions( all goods under consideration are market goods, the consumer must
pay the same price per unit no matter how few or many sheBhe consumes, and the
consumer's money income is fixed. &ach of these could be replaced with other
assumptions. ;onsumers could en8oy home#produced goods and services +we all
do4. The consumer could receive quantity discounts or, in rare cases, sheBhe could
buy so much of a good that the price is driven up. inally, the consumer model
could be extended to encompass decisions about how much to work and, therefore,
how much income to have.
To keep the analysis tractable and to combine it with the analysis of
indifference curves, we assume that the consumer purchases two goods, , and =.
The assumptions in the preceding paragraph imply a budget constraint of the
following form(
G
,
, H G
=
= * 3,
where G
,
and G
=
are the prices of the two goods and 3 is money income. Dne such
budget line, where 3 * I-JE per period, G
,
* IE per unit of , and G
=
* IK per unit
of = appears in igure <.< below.
Figure ( #udget )ine
The endpoints are , * 99 +3BG
,
* I-JEBIE * 99 units of ,4 and = * .?.J.E
+by similar calculation4. The slope is +#4.?.J.EB99 * +#4?.J.E, which is the value of
G
,
BG
=
. 7iven the assumptions of the model, the budget line's slope is always the
ratio of the product prices.
: change in either the price of one of the goods or of money income will
shift the budget line. :n increased money income does not affect the slope of the
budget line, but shifts the budget line in a parallel fashion. ;hanging either price
causes the budget line slope to change. +Df course, if all prices and income were to
change in the same proportion, say double, then the budget line would not change
at all.4 igures <.E and <.J show the effects of an increased price of good = and of
a decreased money income.
igure E shows the effect of reducing the consumer's money income from
I-JE to I-9E. The slope remains +#4?.J.E +IEBIK4. igure J demonstrates that an
increase in the price of good = pivots the budget line inward along the =#axis.
0ow the budget line lies below the original line +except at = * ?4 and has a slope
of +#4EB-.4.
Figure * +ffect of ,educed Inco&e
Figure - +ffect of Increase .
"

Utility &a%i&i'ation sub/ect to the budget constraint
The utility function reflects the consumer's preference. The budget line
reflects the consumers options. The two are inherently unrelated. 6hat brings the
two together is rational behavior>the consumer's efforts to achieve the maximum
possible utility level. The consumer can control one thing, the combination of ,
and =. "eBshe does this in a way that leads to the highest possible indifference
curve>the one farthest to the northeast. igure @ shows how the budget line and
indifference curves depict the utility#maximi!ing basket of , and =.
Figure 01 2chieving $a%i&u& Utility
The consumer may choose any point on the budget line. :ll but one are
suboptimal. our such points are those defined by the intersection of the budget
line and Indifference ;urves - and .. The single optimal point +basket of goods4 is
the one at which the slope of the indifference curve equals the slope of the budget
line.
Cecall that the slope of the indifference curve, the marginal rate of
substitution, equals the rate at which the consumer is willing to exchange , for =.
The slope of the budget line shows the rate at which the consumer can affect such
exchange.
=et another view of this point of tangency follows from these two facts( the
slope of the budget line is +#4G
,
BG
=
and the slope of the indifference curve is
+#43)
,
B3)
=
. This implies that the utility#maximi!ing consumer will choose the
basket at which
G
,
BG
=
* 3)
,
B3)
=
, or 3)
,
BG
,
* 3)
=
BG
=
The intuitive content of this equation is straightforward. The consumer
maximi!es utility by choosing a basket such that, at the margin, sheBhe gains the
same utility from the marginal dollar spent on each of the two goods. If this person
were given a small increment in income sheBhe would achieve the same additional
utility by spending that increment on either , or =.
Conclusion
The study of consumer utility is interesting, but complex science.
In this paper outlined the basic concepts of consumer behavior problems, factors
influencing consumer choice, but consider all the common theme in the same work
impossible. I would like to highlight the main findings of the implementation of
the course work(
# ;hoosing goods for consumption, buyers guide their preferences1
# ;onsumer behavior is rational, in particular, he proposes certain ob8ectives and
guided by self#interest, that is valid within a reasonable individual1
# The consumer seeks to maximi!e total utility, in other words, tends to choose a
set of benefits that brings him the greatest overall amount of utility1
# ;onsumer choice and its sub8ective assessment of utility purchased goods
affects the law of diminishing marginal utility1
# 6hen choosing goods possible consumer goods prices and limited his income #
budget constraint.
# :long with the general principles of rational consumer choice, there are features
that are determined by the influence on him of tastes and preferences, as well as
various external factors shaping his choice.
# ;onsumer choice is a set of benefits that brings consumers a maximum total
utility under a budget constraint.
Thus, the key points that were identified during the work determine the most
accurate picture of the problems faced by the consumer is changing its behavior
under the influence of the most diverse and sometimes unexpected factors and
what motivated his choice.
)ist of literature1
3c;onnell ;., Brue 2., lynn 2. &conomics 3c7raw#"illBIrwin L .??K, M-J pages
in color, -Kth &dition
"ausman, N. :. -MK-. &xact consumer's surplus and deadweight loss. :merican
&conomic Ceview @-, JJ.L@J.
6illig, C. -M@J. ;onsumer's surplus without apology. :merican &conomic
Ceview JJ, EKMLM@.