Consumer Behavior and Utility Maximization Problem?

Question

In the last decade or so there has been a dramatic expansion of small retail convenience stores (such as Kwik Shops, 7-Elevens, Gas'N Shops) although their prices are generally much higher than those in the large supermarkets. What explains the success of the convenience stores?

Answer 1

The answer to your question  is in the question itself. It is the convenience which makes a cosumer willing to pay a little more than the prices at super markets.  Generally convenience stores are nearer the residence and just on the flanks of where one refils gas or on the way to office. These retailsstores are generally not crowded. For purchasing a few items, one dislikes to go to supermarkets where the crowd is more and transacting purchases takes a little time including queues. You save petrol by not going to super markets far away. Convenience store products are priced for the product content and quality as also petrol and time savinmg on driving and often personal rapo.

Answer 2

CONSUMER BEHAVIOR AND UTILITY

As consumers, people are constantly forced into making choices. They face a variety of goods and services which can be purchased, but a limited amount of money with which those purchases can be made. The theory of consumer behavior explains how people can best utilize their resources to achieve the highest level of satisfaction possible.

Preferences and the Concept of Utility

What people consume is not necessarily what they prefer. Resource constraints - limits on time and money - force individuals to choose between alternative goods. Preferences are simply the way an individual ranks alternative goods or groups of goods. Some people like oranges, and some like apples. Economists tend to relate those preferences to utility, the satisfaction an individual will derive from consumption. Economists have found several desirable traits by which to characterize preferences. Most help in depicting preferences mathematically, but one is of particular interest here, a concept known as "more is better". "More is better" just means that, all else equal, a person prefers more consumption to less.

Utility

Economists can not directly measure utility or say how much one package of consumption is preferred to another because preferences are ordinal not cardinal. It is possible to say that one market basket is preferred to another, but not by how much. Faced with two possible baskets of goods, A and B, an ordinal ranking tells us that A is preferred to B. A cardinal ranking would be much stronger. It would tell us, for example, that basket A gives twice as much utility as basket B. Since we don't have a measure of utility, the best we can do is the ordinal measure.

Marginal Utility

The marginal utility of a good X, denoted MUX, is the change in total utility that comes from a small change in the amount of X consumed, holding all else constant. So if DX means a small change in the amount of X consumed, MUX=DU/DX, where DU is the change in utility.  . One of the fundamental concepts of economics is the idea that (eventually) the marginal utility of all goods decreases as the amount of the good consumed increases. In other words, as an individual consumes more and more of a good, the marginal utility of the last unit consumed goes down. When marginal utility is falling as consumption increases it is called Diminishing Marginal Utility (DMS). If an individual consumes more of a good, the marginal utility falls, but if consumption of a good is cut back the marginal utility derived from the last unit consumed increases.

DMS seems to ignore "more is better", but not really. Utility refers to satisfaction from total consumption; marginal utility only to the additional satisfaction from one more unit of a particular good. "More is better" applies to utility only, not marginal utility. In short, everybody always wants more of something. But they might not want more of a specific thing.



Consumer Equilibrium: Maximizing Utility Subject to a Budget Constraint

Consumers do not have unlimited budgets. In general, a choice must be made on how to allocate money to purchasing different amounts of each good. The problem of consumer equilibrium is what that allocation should be. For the purpose of illustration, however, we will usually look at a two good world, with the only constraint being money. It helps simplify the analysis.

Assume an individual has an amount M of money available for purchases, and faces prices Px for good X and Py the good Y. Then the individual has a budget constraint given by the equation M=PxX+PyY. The total amount spent of good X, its price times the quantity consumed, plus the total amount spent on good Y, can not exceed the money available for purchases. The budget constraint gives the first rule for consumer equilibrium: Spend all your budget. If some of the budget is saved, it can be interpreted as a reserve for future consumption anyway, so the rule still holds, just across time.

The second rule is a bit more complicated. It tells how to allocate the budget across competing uses. Mathematically, the rule is to allocate the budget so MUX/Px=MUY/Py.. That is, allocate your available resources so the marginal utility per unit price of each good is equal. This means is the marginal utility for the last dollar spent on each good should be the same.

It is easiest to understand this rule by looking at possible adjustments if the rule is violated. Suppose, at some consumption package, the marginal utility of X equals 10 and the marginal utility of Y equals 20. And suppose both X and Y cost one dollar per unit. If one dollar that had been spent on X is transferred to Y, total utility would increase by about 10 units. One dollar less spent on X would reduce total utility by the marginal utility of X, given as 10. But as that dollar is spent on another unit of Y, the consumer gains the marginal utility of Y, or 20 units of additional utility. The net change is an increase of 10 units of utility.