Unit 2.4: Consumer and producer behaviour (HL only)
Under the previous curriculum this page would have been included in the section on consumer utility and can also be used as the basis for a TOK exercise. Under the new syllabus this section has been expanded to include some new concepts, which are listed on the key terms at the beginning of the activity handout.
Why does the utility (level of enjoyment) diminish as consumption of a good or service rises. What is the relationship between consumption of a product and total utility?
Lesson time: 1 hour
- To understand and define the key concepts of marginal and total utility, rationality and a consumers saturation point
- To understand why the marginal utility of a good or service diminishes as consumption rises
- To understand the concept of rationality and why it is so difficult for consumers to be rational.
Utility - This can simply be defined as the amount of pleasure gained from consuming one unit of a good or service, measured in utils.
Marginal utility - the additional satisfaction a consumer gains when they consume one extra unit of a good or service.
Total utility - the total satisfaction that a consumer enjoys when they consume a specific good or service.
Law of diminishing marginal utility – the theory that states that as an individual consumes more of a good or service then the marginal utility enjoyed by each additional unit falls.
Saturation point – the point of consumption after which total utility falls and marginal utility falls below zero.
Rational consumer - a consumer is rational if he / she decides on the option that maximises his/her utility, based on the choices and budgetary constraints available to them.
Behavioural nudges - alternatives to using standard government interventions in markets e.g. through taxes and subsidies to influence the choices that people make in their everyday lives.
Biases - anchors create a bias in favour of a particular decision. For example, what individuals first encounter, see or hear, become the anchor from which future decisions are assessed.
Bounded rationality - the idea that in decision-making, rationality of individuals is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.
Bounded self-control - to question the idea that individuals are able to exercise self-control when presented with certain choices.
Available as a class handout at: Utility
Begin with this fun activity. Firstly ask for one or two (willing) volunteers and you will also need several bars of chocolate. Ask each student to eat half a bar of chocolate and then indicate the level of enjoyment gained, measured in utils. Write down this score before having the students eat the second half of the bar of chocolate. Having consumed the remainder of the chocolate bar have each student should record the utils of pleasure gained on the following table:
|Chocolate bars consumed||Utils of pleasure gained||Total utility|
Repeat the exercise for bars of chocolate two and three. The records should show a gradual fall in the level of utility gained as consumption of the chocolate bars increases (decreasing marginal utility).
Lastly plot your results on the graph.
Activity 2: An example of utilityThe photograph to the left shows Batuhan, a young man who loves to drink tea. Each unit of tea provides him with 20 utils of pleasure. He also enjoys chips and each packet provides him with 6 utils of pleasure. He also spends money on skiing and a days skiing provides him with 15 utils of pleasure.
Prices: chips $ 3, tea $ 2, one days skiing = $ 15
His weekly consumption is as follows:
3 bags of chips, 6 cups of tea and 1 day per week skiing.
So based on the above information, complete the table below and then decide, is Batuhan being rational in his choice of consumption?
Utility per unit
Utility per $ spent
Tea (per cup)
Chips (per packet)
Skiing (per day)
Watch the following video which explains the concepts of marginal utility and then explain why riding a roller coaster, or indeed completing any enjoyable activity provides proportionally less utility as consumption rises?
Activity 5: Applying the law of diminishing marginal utility to BatuhanAs stated above Batuhan enjoys tea - he really enjoys tea. So much that it provides him with more utils of pleasure per $ spent than any other good or service. So he goes into a tea house and downs his first cup of tea. This provides him with 20 utilis of pleasure. He enjoys it so much that he orders another and after that, another. Unfortunately his second cup of tea, while enjoyable, did not provide him with quite as much pleasure as the first - only 12 utils. The third cup of tea, while enjoyable provided him with significantly less utils than the first. This is the law of diminishing marginal utility - each subsequent unit consumed giving less pleasure than the last. The 4th cup provides him with a utility of just 4 utils. By the 5th cup, Batuhan has reached his saturation point as it provides him with a MU of zero.
(a) Plot this information on the graph paper provided.
(b) At what level of consumption should Batuhan stop drinking tea?
(c) Is the rate of diminishing marginal utility constant for all goods and services?
Activity 6: Are you a rational consumer?
1. Write down a list of the expenditures that you make in an average month.
2. By each item outline the utility (pleasure) out of 10 that you receive when you consume each of the above. Are you a rational consumer? If not, why not?
Activity 7: Links to TOK
Examples of relevant TOK essays on utility:
- What is meant by “rationality” in economics? Are there different types of “economic rationality”?
- If economics studies actual human behaviour, should it also study irrational human behaviour?
Link to the assessment
Marginal utility and the law of diminishing returns is also a concept that your HL students will revisit during unit 2.11: Theory of the firm, when the course looks at the relationship between rising output and declining productivity levels.
8. Homework essay
What is a rational human being? Why are humans very rarely rational?
An essay template for this homework exercise can be accessed at: Essay template
The mark scheme is available as a PDF file at: Homework markscheme