Consumer behavior and usefulness of the product. Product utility and consumer behavior What is product utility

One additional unit of good (derivative):

Where U (\displaystyle U) is the utility function, and Q (\displaystyle Q)- the quantity of the consumed good.

The principle of marginal utility was set forth almost simultaneously by the three economists Stanley Jevons, Carl Menger and Leon Walras. Although Jevons presented his ideas in a lecture published in , Menger in "The Foundations of Political Economy" in , and Leon Walras in , all three wrote independently. The term "marginal utility" was introduced into economics by Friedrich von Wieser (1851-1926).

The principle of marginal utility boils down to the following: the value of a good of a given kind is determined by the utility of the marginal instance that satisfies the least urgent need.

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marginal utility

Lecture 30: Utility function. marginal utility. Marginal rate of substitution

Consumption, utility and consumer equilibrium in the market

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The concept of marginal utility was first introduced by modern economists who created the theory of value in terms of marginal utility. By this name they understand the least important kind of benefit that this good brings in the sphere of satisfying human needs. Suppose, for example, that bread can be used for human nutrition, for sowing, for feeding livestock, for distilling. His last role is the least important; the ability of bread to satisfy this need is its marginal utility. Even in relation to the same need, a good can have a different marginal utility (for example, bread - for the well-fed and for the hungry). Marginal utility increases when a good is scarce and decreases when it is abundant.

Law of diminishing marginal utility

The law of diminishing marginal utility states that with an increase in the consumption of a good (with the volume of consumption of all other goods unchanged), the total utility received by the consumer increases, but the rate of growth slows down.

Mathematically, this means that the first derivative of the general utility function, depending on the consumption of this good, is positive, but decreases, and the second is negative. In other words, the law of diminishing marginal utility states that the total utility function is increasing and convex upward.

Marginal utility (derivative) decreases with increasing consumption, vanishes at maximum total utility, and then becomes negative, and the total utility, having reached its maximum value, begins to decrease.

For example, for a hungry person, the marginal utility of the first bowl of soup is higher than the second, the second is higher than the third. So it is with other blessings.

From this law follows the need to lower the price in order to encourage the consumer to increase purchases of a particular product.

However, the law of diminishing marginal utility does not always apply for small quantities of goods. For example, if a person takes one pill, he is not completely cured. If two - then it is cured completely, and the marginal utility increases compared to one tablet. However, further consumption of pills can only harm the body, and the marginal utility will become negative.

Limited applicability of the law

• Homogeneous units. You can compare goods with homogeneous units and consumed by one consumer. For example, you can not consider apples and bananas. In the same way, green and red apples cannot be considered together. All items of goods must be of the same weight and quality. For example, if the first apple is sour and the second is sweet, then the second apple will give more satisfaction to the consumer than the first.
• A consumer with unchanging tastes is considered. There should be no change in the tastes, habits, customs, preferences and incomes of the consumer. A change in one of these factors will change the usefulness of the product and the law will no longer apply.
• Consumption continuity. The wording of the law proceeds from the fact that the process of consumption of any product by the consumer is continuous. Otherwise, its marginal utility will not necessarily decline. If there is a pause after the consumption of one unit of the product, then it is quite possible that the need for it will resume and the consumption of the next unit of the product will give the same satisfaction as from the previous one.
• Fixed prices. Prices for the product or its substitutes are assumed to be unchanged. The consumer may refuse to purchase a product or increase purchases only because of a change in price, and not because there has been a change in the assessment of the usefulness of the product.

In practice, the simultaneous fulfillment of all these conditions is extremely rare.

A product and its properties such as utility, cost and price are one of the main categories in economic theory. Under commodity understand goods that are created not for personal consumption, but for sale or exchange. The modern market considers as a commodity the products of all industries, services, information, resources, labor, intellectual property, money, etc.

A good becomes a commodity when it has the following properties:

• utility, or use value;
• exchange value.

Each product is sold at a certain price, which is formed under the influence of many factors, among which utility and cost will be key.

Product usefulness

Definition 1

Under usefulness understand the ability of a product to satisfy a human need. Utility is a subjective concept individually assessed by each consumer depending on his needs. So, for a philatelist a rare postage stamp will be highly useful, but for an ignorant person it is just a piece of paper.

Remark 1

Utility will not always be objectively useful to a person. For example, tobacco is harmful to health, but it has benefits for the smoker.

Distinguish between total and marginal utility. General is the total utility derived from the consumption of all units of the good. It grows in proportion to the volume of consumption up to a certain level, then the rate of its growth decreases.

Picture 1.

marginal utility represents the utility obtained by consuming an additional (marginal) unit of a good. Exists law of diminishing marginal utility which states that as more units of a good are consumed, marginal utility decreases. For example, for a person who is thirsty, the third glass of water drunk will be less useful than the second, and the second less than the first.

The more units of goods a person has, the less value they represent for him. Here we come to the definition of the second property of a product, which is inextricably linked with utility - its cost, or values. The usefulness of a commodity is a prerequisite for its acquisition of exchange value.

Figure 2.

Cost of goods

Exchange value allows, in certain proportions, to exchange one commodity for another. Value as an economic category has always been under the scrutiny of economists who have put forward several theories of its formation, among them:

• labor theory of value;
• marginal utility theory;
• theory of production costs;
• theory of supply and demand.

Remark 2

The "father" of economic theory A. Smith believed that the cost is equal to the labor that is spent on the production of goods, calculated as wages, as well as profit and rent. His views were shared by D. Ricardo, and then further developed by K. Marx.

labor theory It boils down to the fact that when calculating the cost, socially necessary labor costs are taken into account, which are determined by the average conditions of production, the intensity of labor and the skills of workers. Employers who can reduce labor costs, for example by using advanced technologies, are the winners.

The theory of marginal utility was put forward by representatives of the Austrian school of economics, and today it is followed by leading Western economists. It is based on such concepts as usefulness and rarity of goods.

This theory implies that the value of goods is determined by their marginal utility. Within the framework of the theory, there are:

• subjective value as an individual assessment of the goods by the buyer and seller;
• objective value - the price that is formed by a competitive market.

In The Wealth of Nations, A. Smith wrote about the paradox of value, which lies in the fact that the water necessary for life has a lower cost compared to diamonds, which bring much less use.

Later, economists explained this paradox by saying that the value of a good is determined by the utility of an additional (marginal) unit of the good consumed by society. Water has a low value because its supply is unlimited, which is not the case with diamonds.

Relationship between cost and price of goods

Classical economic theory defines price as the monetary expression of value. Since a product is sold in a market with many counterparties and is influenced by many factors, its price depends on:

• supply and demand;
• manufacturer's image;
• production costs;
• utility of the product for the customer.

The price is not always equal to the value of the goods, but may exceed it or, conversely, be lower.

The neoclassical theory, the founder of which is A. Marshall, claims that the price is determined depending on:

• marginal utility on the part of the buyer
• production costs on the part of the seller.

The market forces the seller and the buyer to compromise, that is, it sets the limit acceptable prices for both sides. Marshal argued that the principles of "ultimate utility" and "cost of production" could be compared to the blades of scissors.

Remark 3

The pricing mechanism regulates production by determining what is beneficial and what is not beneficial to society. As a result of market fluctuations in prices, manufacturers are forced to reduce manufacturing costs, which stimulates the development of new technologies. This leads to the acceleration of technological progress and the elimination of producers who cannot conduct an efficient business.

Thus, the price, cost and usefulness of the goods are closely interconnected and determine the relationship between all participants in market relations.

The utility of a good is the higher, the greater the number of consumers it serves, the more urgent and widespread these needs are, and the better and more completely it satisfies them. Utility is a necessary condition for an object to acquire an exchange value. Some economists have even tried to build a theory of exchange value on Utility (see Value).

see also

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The main factor of consumer choice is utility one product or another. Utility expresses the degree of satisfaction received by the subject from the consumption of goods or the performance of any action. Utility- the concept is purely individual. Utility has an important psychological component, because people achieve utility by getting things that bring them satisfaction and giving up things that give them trouble. What is useful for one person may be completely useless for another. In economic analysis, utility is most often used to describe a preference for ranking sets of consumer goods and services. However, even if the product we choose is useful for the consumer, there are circumstances that limit the buyer's ability to purchase it. These constraints are price and income. At the same time, utility itself changes with an increase in the amount of consumed products.

The utility function assigns a number to each set of consumer goods in such a way that if set A is preferred to set B, then the number corresponding to set A will be higher than for B. Utility functions are easier to apply to choice analysis with 3 or more goods, simply because that in this case it is difficult to draw indifference curves.

marginal utility called the additional utility received from the consumption of each subsequent unit of production. In extreme heat, the first glass of sparkling water will have a very high utility, the second - less, and the fifth may be completely useless. Thus, marginal utility is inversely proportional to consumption.

How can be used law of diminishing marginal utility in explaining consumer choice? Suppose we came to the store for shopping, having 350 rubles. Suppose also that there are only two goods: A and B, the prices of which are respectively 50 and 100 rubles. How many units of product A and B will we buy? In other words, how do we allocate our budget for the purchase of these goods based on their usefulness?

Let's evaluate the marginal utility of goods A and B in points based on our subjective ideas and place the data in the appropriate columns of the table. According to our estimate, the purchase of good B will bring us the greatest satisfaction. However, we take into account not only the marginal utility, but also the price of the good. And the price of good B is twice the price of good A. We make a purchase decision based on the utility per unit of money spent, i.e. for 1 rub. Marginal utility data per 1 rub. will be different, therefore, the purchase of 3 units of product A and 2 units of product B will satisfy our needs as much as possible.

Any other combination of quantities of goods A and B at existing prices and a certain amount of available funds (350 rubles) will give a lower total utility for the buyer.

Consumer equilibrium is reached when the ratios of the marginal utilities of individual goods to their prices are equal. Denoting the marginal utility through MU, we get the equality:

What happens if the price of good B doubles? Then for the same 350 rubles. we will buy 3 units of product A and 4 units of product B. Thus, when the price decreases, the quantity of goods purchased will increase.

To satisfy their need, the buyer is not enough to purchase a product. If this is a technically complex product, then the buyer will have to bear the costs of operation (pay for fuel, lubricating oil, spare parts, repairs), pay (if it is a product for industrial purposes) the labor of maintenance personnel, spend money on his training, insurance, etc. d. Thus, the cost of the buyer consists of two parts: the cost of purchasing (the price of the goods) and the costs associated with consumption, called consumption price.

The consumption price is usually much higher than the selling price (in the total operating costs for the entire life of the vehicle, the selling price is no more than 20%, truck- 15%, main aircraft 10-12%, household refrigerator - approximately 10%), therefore, the most competitive is not the product that is offered at the lowest price on the market, but the one that has minimum price consumption for the entire period of its service with the consumer.