Theory of Consumer Behavior
Javier Ramirez
Liberty University
BUSI 520: Strategic Marketing Management
Muriel Wilson
January 8, 2022
Theory of Consumer Behavior
Consumer Behaviour is the study of individual customers, organizations, or groups’
behaviour while selecting, purchasing, using, and disposing of the goods, ideas, and services
so they can meet their wants and needs. In simple terms, consumer behaviour is the study
of consumers’ actions and reactions in the marketplace Consumer.
A consumer is a person who purchases goods and services for the satisfaction of needs
and wants. A consumer is the end-user of the goods and services and cannot resell them.
The choice and need of the consumer for a good and service have a great impact on various
decisions of an organization.
Importance of Consumer
A consumer creates demand for different products in the market. It means that the
needs and wants of a consumer for different goods and services create its demand in the
market and hence, the need to produce them.
A consumer consumes not only goods, but also a variety of services. Hence, the
consumers in a market enhance the diversification of different services. Examples of services
are banking, health care, insurance, etc.
A consumer also plays a crucial role in increasing demand for consumer goods.
Consumer goods are of two types: durable and non-durable goods. Durable goods are those
consumer goods that have a life span of more than three years, such as television,
refrigerator, washing machine, etc. However, non-durable goods are those consumer goods
that have a life span of less than three years or can be a single use goods such as drinks,
snacks, fruits, etc.
Consumer Behaviour
The behaviour of a person is the way they act or behave in a certain situation. Every
individual has different perspectives, opinions, views, wants, tastes and needs. Hence,
consumer behaviour deals with the way consumers spend their income on different services
and goods. For example, if a consumer has ₹2,000 and has different options to spend the
money, like movies, clothes and food, there are different ways in which he can spend the
money. He can either spend the whole amount on one option or distribute the amount
among two or more options. The way in which the consumer uses his money will show his
behaviour or consumer behaviour.
Utility
Utility is the want satisfying power of a consumer for a specific commodity. A consumer
decides the demand for a good based on the utility he/ she derives from the consumption of
that good. In simple terms, utility is the satisfaction gained by the consumer after the
consumption of a specific good. Utility is subjective in nature, and hence, different
individuals gain different levels of utility from the same good. The more a consumer needs a
commodity after its consumption, the more will be the utility derived from that commodity.
For example, a consumer who likes ice cream will derive more utility from its consumption
than some other consumer who is not fond of ice cream.
Study of Consumer Behaviour
Cardinal Utility Approach
Under the cardinal utility approach, we assume that the utility level can be measured
and expressed in numbers. For example, we can measure the utility of a commodity, let’s
say, chocolates, and say that a consumer gets 20 units of utility from chocolates.
Ordinal Utility Approach
Even though the cardinal utility approach is simple, it has a major drawback, as in real-
life, we cannot measure their satisfaction level in numbers. However, we can rank our
preferences amongst the alternatives by expressing which commodity gives less or more
utility. For example, there are two commodities, apple and banana; the consumer consumes
both commodities, and likes apples more than bananas. We can say that an apple provides
the consumer with more utility than a banana.
Cardinal Utility
The two different measures of utility under cardinal utility are:
1. Total Utility
The total utility of a commodity’s fixed quantity is the total satisfaction level derived by
a consumer from the consumption of a given commodity. The total utility of a commodity
depends on the quantity consumed by the consumer. For example, the total utility of a
commodity, let’s say, mango, is derived from consuming 10 units.
2. Marginal Utility
The marginal utility of a commodity is the change in its total utility because of the
consumption of one additional unit of the commodity. For example, suppose 5 chocolates
give a consumer 20 units of total utility, and 6 chocolates give him 25 units of utility. The
consumption of one extra chocolate will provide him extra utility of 5 units. Therefore, the
marginal utility of the consumer will be 5. Hence, the formula for determining the MU of a
commodity is
Law of diminishing marginal utility
The law of diminishing marginal utility states that as a consumer consumes more of a
commodity, the marginal utility derived from every additional unit consumed will decrease.
The law of demand is based on the law of diminishing marginal utility. It means that a
consumer is ready to spend less money for more units of a product as the utility level for the
commodity decreases with the increase in consumption.
Assumptions for the law of diminishing marginal utility are:
There is continuous consumption of a commodity.
The consumer is consuming only standard units of a commodity.
The satisfaction level is measured in numerical or quantitative terms.
The quality of a commodity does not change.
The consumer consuming the commodities is rational.
The income of the consumer and the price of the commodity are fixed.
Ordinal Utility
Indifference curve
An indifference curve is a graphical representation of two commodities giving the same
level of satisfaction to a consumer. It means that every point of the indifference curve gives
the same satisfaction level to the consumer. For example, the satisfaction level gained by
Sam from consumption of 1 unit of apple and 14 units of mango is the same as the
satisfaction gained by her from consumption of 2 units of apple and 8 units of mango
