Economics · Ch 2 — Theory of Consumption
Introduction to Consumption and Utility Analysis
Introduction to Consumption and Utility Analysis
Consumption is the act of using goods and services to satisfy human wants. Every economic activity ultimately traces back to consumption, because production, exchange and distribution all exist to make consumption possible. A want is a felt need for a good or service; wants are unlimited in number but each individual want is satiable, meaning it can be satisfied to some extent by consuming a sufficient quantity of the good in question.
The capacity of a commodity to satisfy a human want is called its utility. Utility is subjective — it depends on the consumer's own preferences, the intensity of the want at that moment, and the circumstances of consumption, so the same commodity can carry a different utility for different people, or even for the same person at different times. Utility should not be confused with usefulness or morality: a commodity that is harmful, such as a cigarette, still has utility for the smoker who wants it, because utility only measures want-satisfying power, not social desirability.
Economists have historically analysed how a rational consumer decides how much of a good to buy, and how to divide a limited income among competing goods, through two broad approaches: the cardinal utility approach associated with Alfred Marshall, which assumes utility can be measured in absolute numerical units, and the ordinal utility approach developed by J. R. Hicks and R. G. D. Allen, which assumes a consumer can only rank combinations of goods as more, less or equally preferred, without attaching a precise number to the satisfaction. This chapter, part of the Andhra Pradesh Intermediate first-year Economics syllabus prescribed by the Board of Intermediate Education, Andhra Pradesh (BIEAP), develops both approaches — the laws of diminishing marginal utility and equi-marginal utility under the cardinal approach, and indifference curve analysis and consumer equilibrium under the ordinal approach — building the theoretical foundation for the theory of demand that follows.
A felt need or desire for a good or service that can be satisfied, wholly or partly, by consuming a sufficient quantity of it. Wants are unlimited in number but each individual want is satiable.
The want-satisfying capacity of a commodity or service. Utility is subjective, relative to the consumer and the situation, and carries no moral or ethical connotation.
The act of using up goods and services to derive satisfaction or utility; the final stage of economic activity toward which production, exchange and distribution are directed.