What is Microeconomics? | What is Macroeconomics? | What is Theory of Consumer Behavior? | What is Utility? | What are the factors to be considered while studying the concept of Utility?
Introduction
In economics, as we have discussed in previous sessions, we
study how individuals behave that is make economic decisions in the face of
scarcity. The individuals have unlimited needs and wants to be fulfilled but
have limited resources which are required to fulfill them. Thus they need make
choices and prioritize their needs and wants to be fulfilled. Individuals here
includes people, families, firms and business units.
Microeconomics vs. Macroeconomics
Now this behavior is studied at two levels; namely micro
level that is at individual level separately and at macro level taking the
individuals collectively. The branch of economics which studies the individual
behavior at micro level is known as Microeconomics. The branch of economics
which studies the individuals collectively at country and societal level where
we discuss the aggregate output and consumption is known as Macroeconomics.
In Microeconomics too, we study each segment separately. The
segments overall consist of two components that is Consumers at individual
level and Firms & Business units. The study of behavior of individual
consumer in face of economic decision making is called the Theory of Consumer
Behavior which is what we are going to study in this as well as upcoming
sessions.
Consumer Behavior Theory
As discussed, the study of behavior of individual consumer
in face of economic decision making is called the Theory of Consumer Behavior.
Consumer has to make choice which we call economic or monetary decision as to
on what goods and services because they have limited income. This economic
problem is famously known as problem of choice.
Every consumer tries to spend their available resources in
the best possible manner to get the maximum satisfaction from the combination
of goods and services they spend on and consume. For every consumer this
combination is different and this depends on factors such as the likes of
consumer which we also call it as preferences and also the level of income of
the consumer that is what the consumer can afford to buy.
So now we know that to study the above phenomenon of
consumer behavior choices and preference in the light of what the consumer can
afford to buy and income level is all included in the theory of consumer
behavior. But now the question is how we can study the same? There are two ways
to study the consumer behavior; that is Cardinal Utility Analysis and Ordinal
Utility Analysis.
But before we dwell into above approaches to study the
consumer behavior, it is important to understand the base of the same, that is
Utility.
What is Utility?
Utility in general and at its most simple sense is called the
satisfaction. So when we talk about the utility of a product, we are talking
about the satisfaction that can be derived from that product. Why is it
important? It is very important because that is the core reason a consumer
demands a particular product. The consumer demands a product which can give
maximum utility or satisfaction to them. And thus the utility of a product may
be a good or commodity or service, is its capacity to satisfy want of the consumer
that is want satisfying capacity. In simple words, the more a consumer needs or
wants a product, the more utility the consumer will derive from that product.
What are the factors to be considered while studying the concept of Utility?
It is very important that we understand few things about
utility before moving on to discuss in detail. The phenomenon of utility is
subjective that is to say, different consumers can derive different utilities
from the same product. Because the level of utility a consumer derives from a
product or commodity depends on how strong the desire is of the consumer to
consume that product or commodity. Not all people have same strong desire for a
particular product for example, A, (a person) has a stronger desire to consume
pizza than the person B who do not like pizza that much. So if both are given a
pizza, then the utility derived by A, from consuming the pizza would be more
than the utility derived by B from consuming the same. So Utility is
subjective.
Secondly, even for the same person, the utility derived from
a product changes as the time and place changes. For example, utility derived
from raincoat by person A in monsoon is more than in summer and winter, because
time is different. And utility derived from the same raincoat is different when
the person A is on trip to tropical rain forest as compared to sitting at home,
because place is different.
So it is important to keep in mind that utility of a product
for consumer, that is the satisfaction a consumer derives from a particular product,
service or commodity is a matter of subjectivity. Different consumer derives
different utility from the same product as the desire to have the same product
could be different for different consumers. And even in case of same consumer,
the utility derived from the same product, service or commodity could be
different depending upon the time of consumption and the place of consumption.
Conclusion
So in microeconomics, we study different individuals separately.
The study of behavior of individual consumer in face of economic decision
making is called the Theory of Consumer Behavior. And consumer have to make
different choices which we also know as preferences. Why they need to make
choices, because they have unlimited needs and wants and limited income, money
or resources to satisfy the same. And the satisfaction that they derive from a
product is known as Utility of that product. Different consumers derive
different level of utility or satisfaction from the same product as the desire
for the product can be different for different consumer. And even for the same
consumer, the utility derived from the same product, service or commodity could
be different depending upon the time of consumption and the place of
consumption.
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