Introduction To Economics Bs-It 5 Semester: Teacher Name: Fizza Shaukat

Introduction to economics
BS-IT 5th semester

Teacher name: Fizza Shaukat
Lecture 1
Consumption/Consumer Theory/consumer behaviour
Consumer theory is the study of how people decide to

spend their money based on their individual
preferences and budget constraints.
A branch of microeconomics, consumer theory shows
how individuals make choices, subject to how much
income they have available to spend and the prices of
goods and services.
Continue..
Consumer theory is the study of how people decide to
spend their money based on their individual preferences
and budget constraints.
Building a better understanding of individuals' tastes
and incomes is important because these factors impact the
shape of the overall economy.
Consumer theory is not flawless, though, as it based on a
number of assumptions about human behavior.
 Consumers analyze the optimal way in which to leverage
their purchasing power to maximize their utility and
minimize opportunity costs through employing trade -offs.
The importance of consumption
It is base for Economic activities.
Base for production
Base for fair distribution of wealth
Base for efficiency
Utility
The satisfaction which is derived from the consumption f
goods and services.
A utility is a measure of how much one enjoys a movie,
favourite food, or other goods. It varies with the amount
of desire.
One can conclude the following conclusions
A Utility of a good differs from one consumer to another.
It keeps on changing for the same consumer due to
change in the amount of desires.
It should not be equated with its usefulness
Measurement of Utility
Measurement of a utility helps in analyzing the
demand behaviour of a customer. It is measured in two
ways
Measurement of
utility
Cardinal
Ordinal approach
approach
Can be Cannot be
measured measured
Cardinal Approach
In this approach, one believes that it is measurable. One can

express his or her satisfaction in cardinal numbers i.e., the
quantitative numbers such as 1, 2, 3, and so on. It tells the
preference of a customer in cardinal measurement. It is
measured in utils.
Limitation of Cardinal Approach
In the real world, one cannot always measure utility.
One cannot add different types of satisfaction from different
goods.
For measuring it, it is assumed that utility of consumption of
one good is independent of that of another.
It does not analyze the effect of a change in the price.
Ordinal Approach
In this approach, one believes that it is comparable. One can
express his or her satisfaction in ranking. One can compare
commodities and give them certain ranks like first, second,
tenth, etc. It shows the order of preference. An ordinal
approach is a qualitative approach to measuring a utility.
Limitation of Ordinal Approach
It assumes that there are only two goods or two baskets of
goods. It is not always true.
Assigning a numerical value to a concept of utility is not easy.
The consumer’s choice is expected to be either transitive or
consistent. It is always not possible.
Types of Utility
It is basically of three types
Initial utility:
It is the amount of utility which we get from very first unit of consumption.
Marginal
It is the additional satisfaction gained from each extra unit of consumption. It decreases with each additional increase in
the consumption of a good.
Marginal Utility (M.U.) = Change in T.U. / Change in Total Quantity = Δ TU/ Δ Q
Positive utility:
The amount of utility that gives positive satisfaction.
Satiety:
When the marginal utility is zero and total utility is maximum, that is known saturation point or point of satiety.
Negative utility;
Utility that gives negative satisfaction. it happens when consume more than necessary leading to a further decrease in
marginal utility.
Total
The sum of the total satisfaction from the consumption of specific goods or services. It increases as more goods are
consumed.
Total Utility (T.U.) = U1 + U2 + … + Un
Average
One can obtain it by dividing the total unit of consumption by the number of total units. Suppose there are total n units,
then
Average Utility (A.U.) = T.U. / Number of units = T.U. / n
Table
Units consume Marginal utility Total utility
1 8 8
2 6 14
3 4 18
4 2 20
5 0 20
6 -2 18

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Introduction To Economics Bs-It 5 Semester: Teacher Name: Fizza Shaukat

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Introduction to economics

BS-IT 5th semester

Consumer theory is the study of how people decide to

In this approach, one believes that it is measurable. One can

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