INTRODUCTION TO THEORY OF CONSUMER BEHAVIOUR

UTILITY

In economics, utility means:

Amount of satisfaction which a consumer derives (obtains) from the consumption of a commodity or service rendered at a particular time”.

The amount of satisfaction obtained from a commodity or the level of utility in a product or service varies from one individual to another.

For instance, Mr. Steve (a black man) derives utility from consumption of garri, akpu and amala. But Mr. Smith (a European) regards them as items of less or no value. They don’t give him any form of satisfaction. This implies that a commodity does not possess a specific amount of utility (satisfaction). It depends largely on individual estimate of the importance of the commodity.

Time, place and circumstances also affect the level of utility in a commodity. A cup of tea possesses more utility in the morning than in the afternoon (time). Air-conditioner possesses more utility in tropical climate than in temperate regions (place). A lady or food possesses more utility to a bachelor or a hungry man than a married man or a person who is well fed (circumstance). Thus utility also varies between different time, places and circumstances.

Consumers always compare commodities prices with their utilities before they buy. They only buy goods if their utilities are more or equal to their values or prices and not vice versa, ceteri paribus (all things being equal).

 

Introductory Concepts 

  1. The origin – point of origin of utility: There is a certain amount of commodity a consumer must take before it yields utility or starts giving satisfaction. For instance, a drop of water in the mouth of a thirsty man wouldn’t be of any effect; and it must be increased to some extent or a certain amount like five tablespoons before it can yield any satisfaction. The minimum amount of any commodity that must be consumed or obtained before it starts showing satisfaction is called ‘origin,’ point of origin of utility or origin zone. Thus the point of origin of utility is the beginning of satisfaction.
  2. Utility maximization – the greatest level of satisfaction: Consumer tries to behave rationally especially with regard to the purchases of his wants (goods) with his limited resources (money). Thus he makes efforts to maximize the satisfaction he can obtain from the commodity he buys. A consumer maximizes utility if he derives the greatest satisfaction from a bundle of acquired commodities.

 

Utility function

Utility function (UF) is a statement that shows relationship between total utility and amount of goods and services possessed and/or consumed. Utility function is a brief form of saying that “utility is a function of or depends upon the amount of goods and services consumed”. The higher the quantity consumed, the higher the level of satisfaction, and vice Versa.

Mathematically, utility function is expressed as follows:

Utility = f (goods & services) Symbolically, it is expressed as follows:

U = f (g & s).

Where;

  • u = utility.
  • f = function of.
  • g = goods.
  • s = services.

U = f (g & s) thus means that

‘utility depends upon the amount of goods and services consumed’.

 

Types of utility

There are four major types of utility; they are as follow:

  1. Form utility: This is conversion of an item (a thing, especially raw materials from undesired state to a form desired by a man. It occurs when a raw material , e.g. log, is converted into a finished product , e.g. a chair that is desired by a man. It lays emphasis on importance of production.
  2. Place utility: It is the movement of goods from one place to another. It occurs when an item (a cherry) or a finished product (a chair) is conveyed from the forest or factory where it is useless or it is of less value and not demanded to a place – a market or door steps of consumers where it has much value and there is a high demand for it. It lays emphasis on importance of transportation.
  3. Time Utility: It is the storage of goods until the time when there is demand for them., It occurs when items, especially fresh goods or perishable items, e.g. fresh fishes, vegetable, etc are preserved until the time when there is demand for them. This lays emphasis on importance of storage.
  4. Possession utility: It is exchange of goods for money. A seller creates possession utility by converting the purchasing power (money) in the hand of a buyer into a commodity. Creation of possession utility is selling activity that enables a buyer to take possession (title of ownership) of a commodity after payment. It lays emphasis on importance of marketing (selling) activity.

 

Note: The most important concept in production is ‘Utility’ – consumers satisfaction. In other words, the essential element of a commodity is utility (satisfaction) – ability to give satisfaction to consumers.

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