Table of Contents

Introduction

The theory of consumer behaviour examines how individuals make decisions about the goods and services they buy in order to maximize their satisfaction (utility), given their limited income and the prices of goods. It is a central area in economics because demand for goods originates from consumers’ attempt to maximize satisfaction.

Consumers face the problem of scarcity: their wants are unlimited but resources (income) are limited. Thus, they must make choices. Economists use the concept of utility to measure and analyze consumer choices.

7.1 Utility Concepts: Total, Average, and Marginal Utility

Utility: The satisfaction or pleasure derived from consuming a good or service.

Total Utility (TU):
- The overall satisfaction obtained from consuming a given quantity of a good.
- Example: Eating 3 slices of bread may give total satisfaction of 60 units.
Average Utility (AU):
- The utility per unit consumed.
- Formula:
  AU = TU/Q
- Example: If TU from 3 slices = 60, then AU = 60 ÷ 3 = 20 units.
Marginal Utility (MU):
- The additional satisfaction obtained from consuming one more unit of a good.
- Formula:
  MU = Delta TU \Delta Q]
- Example: If TU rises from 60 to 70 when an extra slice of bread is eaten, MU = 70 – 60 = 10 units.

Key Point for Students:

TU always increases initially, then flattens.
MU usually declines as more is consumed.
AU falls after MU falls below it.

7.2 Utility Schedules and Calculations

A utility schedule shows how TU, AU, and MU change as more units of a commodity are consumed.

Quantity of Bread	TU (units)	AU (TU/Q)	MU (ΔTU)
1	20	20	20
2	38	19	18
3	54	18	16
4	66	16.5	12
5	74	14.8	8
6	78	13	4
7	78	11.1	0
8	76	9.5	-2

Observations:

TU rises at first, then reaches maximum (78), then declines.
MU falls consistently and can become zero or negative.
AU follows the trend of TU but at a slower pace.

7.3 The Law of Diminishing Marginal Utility (DMU)

Statement:
The law states that as more units of a commodity are consumed, the additional satisfaction (marginal utility) derived from each successive unit declines, assuming all other factors remain constant.

Example: The first bottle of water to a thirsty man gives high satisfaction, the second gives less, the third still less, until additional water gives no satisfaction or even discomfort.

Diagram:

X-axis = quantity; Y-axis = MU.
MU curve slopes downward, eventually crossing zero and going negative.

Importance:

Explains downward slope of demand curve.
Basis for consumer equilibrium.
Guides pricing and taxation policy.

7.4 Relationship Between TU, AU, and MU

TU increases as long as MU is positive.
When MU = 0, TU is at maximum.
When MU becomes negative, TU starts falling.
AU is highest when MU = AU.

Teacher’s Emphasis:

Draw TU and MU curves on same graph.
TU curve rises, flattens at maximum, then falls.
MU curve slopes downward, crosses X-axis when TU is maximum.

7.5 Consumer Equilibrium

Definition: A consumer is in equilibrium when he allocates his income in such a way that he obtains the maximum satisfaction, given the prices of goods.

Condition:
{MU_x}/{P_x} = {MU_y}{/P_y}

Where:

(MU_x), (MU_y) = marginal utilities of goods X and Y.
(P_x), (P_y) = prices of goods X and Y.

This is called the equi-marginal principle.

Example:
If MU of apple = 20, price = ₦2 → MU/P = 10.
If MU of banana = 30, price = ₦3 → MU/P = 10.
→ Consumer is in equilibrium.

7.6 Effect of Price Changes on Consumer Equilibrium

When price falls:
- MU/P ratio increases.
- Consumer buys more until MU falls enough to restore equilibrium.
When price rises:
- MU/P ratio falls.
- Consumer buys less until MU rises enough to restore equilibrium.

This adjustment explains why demand curves slope downward.

7.7 Relationship Between Marginal Utility and the Demand Curve

MU is the basis of demand.
As MU decreases with more consumption, consumers are only willing to buy additional units if the price falls.
Thus, MU curve and demand curve both slope downwards.
Demand curve can be regarded as the inverse of the MU curve (when expressed in money terms).

Classroom Example:
A student values the first biro at ₦200, second at ₦150, third at ₦100, fourth at ₦50. If market price = ₦100, he will buy 3 biros. The demand curve is built directly from his MU schedule.

Section A: Objective Questions (30)

Instruction: Choose the option that best completes each statement or answers the question.

Utility in economics refers to:
A. The usefulness of a commodity
B. The satisfaction derived from consuming a good
C. The cost of producing a good
D. The exchange value of a commodity
Total utility is obtained by:
A. Dividing marginal utility by price
B. Summing the marginal utilities of all units consumed
C. Multiplying price by quantity
D. Subtracting average utility from marginal utility
If a consumer’s TU for 4 oranges is 60, then AU is:
A. 20
B. 15
C. 12
D. 10
The additional satisfaction gained from consuming one more unit is called:
A. Total utility
B. Marginal utility
C. Average utility
D. Derived utility
When MU is positive, TU will:
A. Fall
B. Remain constant
C. Increase
D. Be zero
If TU = 120 for 5 units of bread, and TU = 140 for 6 units, the MU of the 6th unit is:
A. 20
B. 25
C. 24
D. 120
When MU = 0, TU is:
A. Falling
B. At maximum
C. Negative
D. Constant
The law of diminishing marginal utility states that as more units of a commodity are consumed:
A. TU declines
B. MU declines
C. AU increases
D. Price must fall
The law of diminishing marginal utility assumes:
A. Consumer’s taste changes
B. All units of the commodity are homogeneous
C. Prices of other goods change
D. Consumer’s income changes
If TU from 3 pencils = 45, and TU from 4 pencils = 56, MU of the 4th pencil is:
A. 56
B. 45
C. 11
D. 14
When TU is at maximum, MU is:
A. Maximum
B. Zero
C. Negative
D. Falling
If MU becomes negative, TU will:
A. Continue to rise
B. Be maximum
C. Decline
D. Remain unchanged
Average utility is obtained by:
A. TU ÷ Price
B. MU ÷ TU
C. TU ÷ Quantity consumed
D. MU ÷ Quantity consumed
The relationship between TU and MU can best be represented by a:
A. Downward-sloping straight line
B. Rising and then falling TU curve, and a downward-sloping MU curve
C. Upward-sloping MU curve and flat TU curve
D. Vertical TU curve and horizontal MU curve
The equi-marginal principle states that consumer equilibrium is achieved when:
A. MUx × Px = MUy × Py
B. MUx ÷ Px = MUy ÷ Py
C. Px ÷ MUx = Py ÷ MUy
D. MUx = MUy
If MU of good X = 40, Px = ₦4; MU of good Y = 30, Py = ₦3, the consumer is:
A. In equilibrium
B. Not in equilibrium
C. Maximizing utility
D. Wasting resources
A fall in the price of a commodity will cause:
A. MU to increase directly
B. Quantity demanded to increase until MU/P falls back to equilibrium
C. TU to remain unchanged
D. AU to fall immediately
When price rises, consumer equilibrium is restored by:
A. Buying more units until MU falls
B. Buying fewer units until MU rises
C. Increasing total utility
D. Decreasing average utility
The demand curve is downward sloping mainly because of:
A. The law of supply
B. The law of diminishing marginal utility
C. The equi-marginal principle
D. The law of variable proportions
Consumer surplus refers to:
A. Excess demand over supply
B. The difference between what a consumer is willing to pay and what he actually pays
C. Total utility minus marginal utility
D. The money value of TU
If MU per naira spent on apples = 12, and on bananas = 8, the consumer should:
A. Buy more apples and less bananas
B. Buy more bananas and less apples
C. Buy equal quantities
D. Stop buying both
Which of these will not shift the demand curve?
A. Change in income
B. Change in price of the commodity itself
C. Change in consumer taste
D. Change in population size
If MU/P of good X > MU/P of good Y, the consumer should:
A. Buy more Y and less X
B. Buy more X and less Y
C. Buy equal amounts of both
D. Stop consuming both
The point of consumer equilibrium corresponds to:
A. The peak of TU curve
B. MU = 0
C. MUx/Px = MUy/Py
D. MU = AU
Which of these correctly explains why the demand curve slopes downwards?
A. As MU falls, consumers buy more only at lower prices
B. As TU falls, prices rise
C. As AU rises, consumers stop buying
D. As MU rises, price must fall
Consumer equilibrium implies:
A. Maximizing total utility without considering income
B. Equal MU for all goods consumed
C. Allocation of income so that MU per naira is equal across goods
D. MU = TU
When a commodity’s price falls, the increase in consumption is explained by:
A. Increase in TU
B. Decrease in MU
C. Increase in MU/P ratio
D. Increase in AU
If TU from 2 oranges is 30, and TU from 3 oranges is 42, then MU of 3rd orange is:
A. 72
B. 12
C. 14
D. 18
Which of the following is a limitation of marginal utility theory?
A. It assumes MU increases indefinitely
B. It is difficult to measure utility in exact units
C. It ignores consumer income
D. It assumes TU always decreases
The relationship between MU and demand curve suggests that:
A. Demand curve is upward sloping
B. MU is the foundation of demand curve
C. TU and demand curve are identical
D. MU is constant regardless of consumption

Section B: Essay / Structured Questions (15)

Instruction: Answer any five (5). Where required, use diagrams and calculations.

Define utility. Distinguish between total utility, average utility, and marginal utility with examples.
Using a utility schedule, explain how TU, AU, and MU are related. Draw the curves for TU and MU.
State and explain the law of diminishing marginal utility. Illustrate with a real-life example and a diagram.
What happens to TU and MU as consumption increases? Illustrate with a diagram.
A consumer’s utility schedule for a commodity is given below:

Quantity	TU
1	10
2	18
3	24
4	28
5	30

(a) Calculate MU for each unit.
(b) Plot TU and MU curves.
(c) Comment on the relationship between TU and MU.

Explain the concept of consumer equilibrium and derive the equilibrium condition.
If MUx = 30, Px = ₦3; MUy = 20, Py = ₦2, determine whether the consumer is in equilibrium. If not, suggest how he should reallocate expenditure.
Explain how a fall in price affects consumer equilibrium. Use a diagram to support your answer.
Discuss the relationship between MU and the demand curve.
Define consumer surplus. Using a diagram, show how consumer surplus arises and explain its significance.
Explain the importance and limitations of the law of diminishing marginal utility.
Discuss the assumptions of marginal utility theory.
Explain how the equi-marginal principle applies when a consumer consumes more than two goods.
A consumer consumes only two goods, rice and beans. If MU of rice = 40, price = ₦4; MU of beans = 36, price = ₦3, determine whether the consumer is in equilibrium. Show workings.
“The law of diminishing marginal utility is the basis of the law of demand.” Discuss with examples.

Answer Key: Theory of Consumer Behaviour

Section A: Objective Answers (30)

B – Utility = satisfaction from consuming a good.
B – TU is the sum of MU of all units.
B – AU = TU ÷ Q = 60 ÷ 4 = 15.
B – MU is the additional satisfaction from one more unit.
C – When MU is positive, TU increases.
A – MU = ΔTU = 140 – 120 = 20.
B – MU = 0 → TU is maximum.
B – The law says MU diminishes with consumption.
B – Assumes homogeneous goods, ceteris paribus.
C – MU = ΔTU = 56 – 45 = 11.
B – TU max when MU = 0.
C – Negative MU means TU falls.
C – AU = TU ÷ Q.
B – TU rises then falls, MU slopes downward.
B – Consumer equilibrium: MUx/Px = MUy/Py.
A – MUx/Px = 40 ÷ 4 = 10, MUy/Py = 30 ÷ 3 = 10. Equal, so equilibrium.
B – Price fall → demand increases until MU/P restores equilibrium.
B – Price rise → buy less until MU rises.
B – Demand curve slopes downward because of diminishing MU.
B – Consumer surplus = willingness to pay – actual price.
A – Higher MU/P for apples → buy more apples.
B – Change in price of the good causes movement along, not a shift.
B – If MU/Px > MU/Py, buy more X.
C – Equilibrium occurs when MUx/Px = MUy/Py.
A – MU falls → need lower prices for more consumption.
C – Income allocated so MU per naira is equal.
C – Price fall → MU/P rises → more consumption.
B – MU = ΔTU = 42 – 30 = 12.
B – Limitation: utility not measurable in cardinal units.
B – Demand curve is based on diminishing MU.

Section B: Essay Questions (15)

1. Define utility. Distinguish between TU, AU, and MU with examples.

Utility = satisfaction from consuming goods.
Total Utility (TU): Total satisfaction (e.g., 3 apples give 30 utils).
Average Utility (AU): TU ÷ Q (30 ÷ 3 = 10 utils).
Marginal Utility (MU): Extra satisfaction from one more unit (TU at 4 apples – TU at 3 apples).

2. Using a utility schedule, explain TU, AU, and MU. Draw curves.

Create a table:

Q	TU	MU	AU
1	10	10	10
2	18	8	9
3	24	6	8
4	28	4	7
5	30	2	6

Diagram: TU rises then flattens; MU slopes down.
Explanation: TU grows, MU declines, AU falls gradually.

3. State and explain the law of diminishing marginal utility.

Law: As more units consumed, MU falls.
Example: First bottle of water refreshing; fourth bottle less satisfying.
Diagram: TU curve rises, MU curve slopes down, eventually hitting zero.

4. What happens to TU and MU as consumption increases?

TU rises initially.
MU declines with each unit.
When MU = 0 → TU max.
When MU < 0 → TU falls.
Diagram supports explanation.

5. Utility schedule question (given in Q).

MU calculation:
- Q1: 10
- Q2: 18 – 10 = 8
- Q3: 24 – 18 = 6
- Q4: 28 – 24 = 4
- Q5: 30 – 28 = 2
TU curve: Rises, levels off at 30.
MU curve: Declines toward 0.
Comment: TU max when MU = 0.

6. Explain consumer equilibrium. Derive condition.

Equilibrium = maximum satisfaction given income & prices.
Condition: MUx/Px = MUy/Py = MUz/Pz.
If unequal, reallocate spending.
Diagram: Indifference curves or MU/P ratio.

7. Numerical equilibrium test.

MUx = 30, Px = 3 → MU/P = 10.
MUy = 20, Py = 2 → MU/P = 10.
Equal → consumer is in equilibrium.

8. Explain effect of price fall on consumer equilibrium.

Price fall → MU/P rises.
Consumer buys more until MU falls enough to restore equality.
Diagram: Budget line shifts outward.

9. Relationship between MU and demand curve.

Demand curve slopes down due to diminishing MU.
Consumers willing to pay less for extra units.
Diagram: MU curve mirrors demand curve.

10. Define consumer surplus. Use diagram.

Definition: Difference between willingness to pay and actual price.
Diagram: Demand curve above price line. Shaded area = surplus.
Significance: Benefit to consumers; guides pricing policy.

11. Importance & limitations of the law of diminishing MU.

Importance: Basis of demand law, taxation, pricing.
Limitations: Utility not measurable, assumes homogeneity, ignores Giffen goods.

12. Discuss assumptions of MU theory.

Rational consumer.
Homogeneous goods.
Cardinal measurement possible.
Constant income, prices, and taste.

13. Equi-marginal principle for >2 goods.

MUx/Px = MUy/Py = MUz/Pz.
Consumer distributes income across all goods to equalize utility per naira.
Diagram can illustrate.

14. Rice and beans numerical question.

MU rice = 40, Px = 4 → MU/P = 10.
MU beans = 36, Py = 3 → MU/P = 12.
Not equilibrium.
Consumer should buy more beans, less rice until MU/P equalizes.

15. “The law of diminishing MU is the basis of law of demand.” Discuss.

Diminishing MU → willingness to pay less for extra units.
Explains why demand curve slopes downward.
Example: 1st loaf of bread high MU, 4th loaf low MU, only bought at lower price.