Theory of Consumer Behaviour explores how individuals make decisions to allocate their resources, particularly their income, to various goods and services. Central to this theory is the utility function, which represents the satisfaction a consumer derives from consuming different products. By analysing the relationship between consumption patterns and preferences, the utility function helps explain how consumers aim to maximize their overall satisfaction. Additionally, several factors—ranging from personal tastes and income levels to market conditions and cultural influences—determine consumer choices. Understanding these determinants provides valuable insights into the decision-making process in different economic environments. This article is applicable to all syllabuses of the Boards FBISE, BISELHR, BISERWP, PU, SU, DU, MU and other reputable institutions.
Written by Iftikhar Ali
Table of Contents
Unveiling the Theory of Consumer Behaviour: Decoding Consumer Choices
Utility
Utility is a term from economics that describes how people feel satisfied or happy after using products and services. It is a gauge of the degree of satisfaction that customers feel. It is denoted by “U” and it represents the consumer preferences.
It is used to interpret customer behavior and choices. A key concept in the theory of consumer choice or behavior is utility, which helps explain how people divide up their limited resources among different products and services in order to optimize their well-being.
Definition
“The satisfaction, consumer receives from the use of goods and services is called utility”
Key points of Utility
Subjective
Utility is purely subjective in nature and it varies from person to person. It is possible that different persons may get different level of satisfaction from using goods and services.
Measurement
Concept of utility is purely qualitative in nature but economists quantify it by using units in utils but in real life, utils are not measurable.
Total Utility
Total utility means, total satisfaction obtained by using certain amount goods and services and it is denoted by U or T.U.
Marginal Utility
Additional satisfaction obtained using one more unit of good or service is called marginal utility. Normally, it decreases when consumption increases. It is denoted by M.U
Cardinal Vs Ordinal Approach
In cardinal approach, it is assumed that satisfaction can be measured in numeric terms on the other hand, it is assumed under ordinal approach that satisfaction cannot be measured but we can rank the preferences.
Examples
| Good or Service | Satisfaction |
| Air | Oxygen |
| Water | Thirst |
| Bread | Hunger |
| Burger | Hunger |
| Study | Knowledge |
| Plane, Car, Bus, Train | Travel |
| Doctor | Treatment |
| Fan, Air Conditioner | Cool Air |
Utility Function
A utility function is a mathematical representation of how a consumer derives satisfaction or happiness from consuming a set of goods and services. It assigns a numerical value to each possible bundle of goods, allowing economists to model and analyze consumer preferences and choices. The utility function is used to predict how changes in prices, income, and other factors influence consumption decisions.
Utility obtained U from the quantity consumed Q may be written in functional form as below:
U = f(Q)
In parameter form, it may be written as follows:
U = aQ – bQ² where minus sign with power function is indicating that total utility is increasing with decreasing rate. Here a and b are parameters.
Note:
Utility is present in everything but it is not necessary that everything is useful. For example, drinking alcohol has utility in it for the person who drink it but it is not useful for him so utility is only conceptual term for satisfaction, it is not for usefulness.
Determinants or Characteristics of Utility
Preferences
Personal preferences are a major factor in deciding usefulness. A person’s degree of satisfaction is influenced by the products and services they choose over others.
Intensity
Intensity or degree of need also puts impact, for example water has utility for a thirsty person but it may have no utility for the person who is not thirsty.
Income
Level of income also puts impact on it. Higher income person consumes more and get higher utility as compare to the person have low income
Time
Time also puts impact on utility. It is possible that human gets more utility from use of certain products in young age as compare to old age similarly, toys has more utility for children but has no utility for young & old persons.
Weather
Utility of different products and services may differ as weather changes, for example, ice cream and cold drinks have more utility in summer as compare to winter similarly warm cloths have more utility in winter as compared to summer.
Well-being and Health
A consumer’s utility may be impacted by their health and wellbeing. Those in better health may find greater value in specific products or activities than people who are physically fit and young.
External Factors
Environment, social. and cultural aspects can also affect utility. Individual tastes and consumption patterns can be influenced by social norms, cultural practices, and environmental factors. For example, Sindhi Ajrak may has more utility for people of Sindh as compare to Punjabis, Balochis and Pathans.
Shape changes/Modification
Utility also changes when some good or service changes its shape or modified, for example iron changes to windows and doors, wood changes to furniture has more utility than raw form.
Expectations
Current utility may be influenced by consumers’ expectations regarding future costs, income, and the availability of products and services. For example, a customer may get more value from buying the product now if they anticipate a price increase.
Change in Possession
Utility also changes with change in possession. For example, book of economics has more utility for the student of economics as compare to student of chemistry similarly some business becomes profitable when it goes into the hands of some business minded people.
Change in Place
Utility also changes when some product changes its place. For example, a herb grown on top hills may have no utility up there but it has more utility when it is brought down to the cities and convert into patent product.
Quality and Brand Perception
Brand perception and quality also puts impact on the utility. As products have higher quality also have higher utility as compare to low quality and low brand products.
For other useful resources about Economics, you may visit the link below:
