Consumer's Behaviour and Utility Maximization

• Utility
-  is a measure of the relative satisfaction from or desirability of consumption of various goods and services.
• Cardinal Approach 
- Classical method of understanding utility
- All are quantifiable (all have numbers) to have better understanding
- Uses utils as measurement of satisfaction
- comparing two goods
• Utils
- are a measure of satisfaction or happiness.
- are hypothetical numbers that are used to rank your satisfaction.
• Ordinal Approach
- New classical method of examining utility 
- Ranking the preferences of the consumers
Ex. Good, Better, Best
- Indifference Curve and budget line
• Total Utility
- Is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity.
• Interpretation in TU
- as more of a product is consumed TU (Total Utility) increases at a diminishing rate, reaches a MAXIMUM and then DECLINES.
• THE LAW OF DIMINISHING MARGINAL UTILITY
- Total Utility is increasing while it is increasing the additional utility in your satisfaction is decreasing because Marginal utility is decreasing.
• Marginal Utility
- is the extra satisfaction a consumer realizes from an additional unit of the product.
- is the change in total utility that results from the consumption of 1 more unit of a product.
• Interpretation in MU
- MU diminishes with increased consumption, becomes ZERO when TU (Total Utility) is at the maximum and is NEGATIVE when TU (Total Utility) declines.
• CONSUMER BEHAVIOR THEORY
- Cardinal utility allows precise quantification of the marginal utilities upon which the utility-maximizing rule depends.
• Rational Behavior
- The consumer is a rational person, who tries to use his or her money income to derive the greatest amount of satisfaction, or utility from it.
• Preferences
- Buyers also have a good idea of how much marginal utility they will get from successive units of the various products they might purchase.
• Budget Constraint
- At any point in time the consumer has a fixed, limited amount of money income.
• Prices of Goods
- Every good carries a price tag and we assume that the price tags are not affected by the amounts of specific goods each person buys.
• Income effect
- is the impact that a change in the price of a product has on a consumer’s real income and consequently on the quantity demanded of that good.
• substitution effect
- is the impact that a change in a product’s price has on its relative expensiveness and consequently on the quantity demanded.