WHAT CONSUMER BEHAVIOUR IS?

WHAT FACTORS AFFECT IT ?

AND

WHY IT SHOULD BE STUDIED?

 DEFINITION
 Consumer behavior is defined as involving
1. The set of decisions (whether, what, why , how ,
when, where, how much, how often, how long)
2. Made about the acquisition, use or disposition
3. Of products, services activities or ideas
4. Made by me or more decision – making entities
5. Overtime
ROLE OF A CONSUMER IN THE
MARKET

 Demand for a firm’s products

 Type of product a firm should produce

 Target customers tastes and preferences

CHOICE AND UTILITY
THEORY
Difference between preference and choice
Preference means when they have a range
of products to choose from. It depends on
consumers’ likes and dislikes which in turn
depends on budget constraints.
Choice means consumers have unlimited
wants or preference and numerous choice
to satisfy them.
Understanding Consumer
Behaviour
Utility and consumer satisfaction

Total and marginal utility

diminishing marginal utility

Marginal utility and the demand curve

an individual’s demand curve.
THE THEORY OF CONSUMER
BEHAVIOUR
 The theory of consumer’s behavior has two
aspects:
1) aggregates aspect
2) expenditure aspects.
The aggregate aspect of the theory belongs to
macroeconomics and shall be discussed in the
chapter on the ‘theory of employment’.
 It is the expenditure aspect of the theory of
consumer’s behavior has also two main approaches
a) Marginal utility approach
b) Indifference curve approach.
 Utility

fig
 UTILITY DEFINITION
Utility was defined as the power or the
ability of a commodity to satisfy human
wants. Utility is thus a measure of
satisfaction that is consumer receives from
the consumption of a commodity. Since
utility is something which is experienced
by the person, it cannot be measured by
someone else. It is subjective; however,
the marginalist school assumed that utility
is measurable.
MEASUREMENT OF
UTILITY
 Cardinal utility approach:-The utility of each
commodity is measurable. Utility is a
cardinal concept. The most convenient
measure is money. The utility is measured
by the monetary units that the consumer is
prepared to pay for another unit of the
commodity.
 Ordinal utility approach:- Utility cannot be
measured, but can only be ranked in order
of preferences.
LAW OF DIMINISHING MARGINAL
UTILITY
 According to the Marshall “the additional
benefit, which a person derives from a given
increase in his stock he already has.”
ASSUMPTIONS OF UTILITY
THEORY
 Consumers are rational
 Consumers always prefer more quantity
 Consumers are ready to make tradeoffs
 Diminishing marginal rate of substitution
DEFINITION OF TOTAL UTILITY AND
MARGINAL UTILITY
TOTAL UTILITY:- The amount of utility a
person derives from the consumption of
a particular product.
MARGINAL UTILITY:- The additional utility
derived by a consumer, by consuming
one more unit of that commodity.
 TABLE
CHIPS( PER TOTAL MARGINAL
PACKET) UTILITY UTILITY

1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 -2
Utility from consuming chips
(daily)
16
(utils)
Utility

14
TU
12

10

0
0 1 2 3 4 5 6
-2
MU

Packets of chips consumed (per day)

RELATIONSHIP BETWEEN TOTAL
UTILITY AND MARGINAL UTILITY
In the initial stages of consumption, the total
utility increases. After consuming certain number
of units the total utility becomes constant and
beyond that it starts reducing
Every increase in the consumption of a product
reduces its marginal utility.
Marginal utility starts diminishing as the consumer
starts consuming more units of a product.
When marginal utility reaches zero, total utility
reaches its maximum and remains constant.
When marginal utility becomes negative, it
implies that the total utility has started
diminishing.
APPLICATION AND USES OF LAW OF
DIMINISHING MARGINAL UTILITY
Explains value paradox
Explains the derivation of law of demand
Explains the redistribution of income
LAW OF EQUI – MARGINAL
UTILITY
According to Marshall “If the consumer has a
commodity that can be put to several
alternative uses, he will distribute it among
the various alternatives in such a way that the
marginal utility in every alternative is equal”.
EXPLANATION OF THE
THEORY
Consumer is in equilibrium in respect of the
purchases of two goods X and Y when
MUx ÷ Px = MUy ÷ Py = Mum
The consumer will go on purchasing goods till the
marginal utility of money expenditure on each
good becomes equal to the marginal utility of
money to him.
DERIVATION OF THE
DEMAND CURVE
The demand curve or law of demand
shows the relationship between price of a
good and its quantity demanded.
In deriving demand curve or law of
demand Marshall assumes the marginal
utility of money expenditure to remain
constant.
When price of a good falls, the consumer
buys more of a good so as to equate his
marginal utility to the lower price
DIAGRAMMATIC PRESENTATION
y

p
Marginal utility

E
and price

p1
E1

mu

o Q1 Q2 x

Quantity
MU, P

Consumption at Q2

P1
a where P2 = MU

b
P2

O Q1 Q2 Q
fig
DIAGRAMMATIC
EXPLANATION
y

chocolate

BX BY

o x
Pizza
SUBSTITUTION AND INCOME
EFFECT
A change in price of product affects
consumer’s behavior and his income.
If the price of the product changes, ceteris
paribus , its causes the purchasing power
of the limited income of a consumer to
decrease or increase it is known as
income effect
The change in price also results in the
product becoming either more expensive
or less expensive relative to other products
existing in the market it is known as
substitution effect
SUBSTITITON EFFECT AND INCOME
EFFECT
Consumer will substitute more of a product
whose price has fallen
Effect of a change in the price of a product on
the consumer’s purchasing power. If the price
of a product decreases, the consumer is left
with some money that can be used to buy
additional units of the same product or a
different product
DIAGRAMMATIC EXPLANATION

Price X

S I

O X
Q Q1 Q2

Quantity
INDIFFERENCE CURVE
ANALYSIS
According to indifference curves theory, utility
is a psychic entity and it cannot therefore be
measured in quantitative cardinal terms.
Utility being a psychological feeling is not
quantifiable.
Indifference curve which represents all those
combinations of goods which give same
satisfaction to the consumer.
 ASSUMPTIONS
 Indifference curves slope downward to the
right/ have a negative slope
Indifference curves are convex to the
origin
Indifference curves cannot intersect each
other
A higher indifference curve represents a
higher level of satisfaction than a lower
indifference curve
MARGINAL RATE OF
SUBSTITUTION
The rate at which the consumer is prepared to
exchange good X and Y is known as marginal
rate of substitution.
∂X x MU X + ∂Y x MUY = 0
or
MU x÷ MU y = ∂X ÷ ∂Y
 TABLE
Combinati Good X Good Y MRSxy
on
A 1 12 -
B 2 8 4
C 3 5 3
D 4 3 2
E 5 2 1
 BUDGET
CONSTAINT
A set of combinations of two commodities that
can be purchased if whole of a given income
is spent on them and its slope is equal to the
negative of the price ratio.
The budget constraint can be written
algebraically as
Px X + P y Y = M
CONSUMER EQUILIBRIUM
A consumer is said to be in equilibrium when
he is buying such a combination of goods as
leaves him with no tendency to rearrange his
purchases of goods
When he maximizes his satisfaction with the
available money income.
CONSUMER EQUILIBRIUM
Y
price

E
IC2
IC
IC1
O X
quantity
CONSUMER SURPLUS
Excess of the price which a consumer would
be willing to pay rather than go without a
thing over that which he actually does pay is
the economic measure of this surplus
satisfaction… it may be called consumer’s
surplus.
Consumer’s surplus = MU – ( price X number
of units of a commodity purchased)
 1 20

1 10
a
1 00
MU, P (Rupee per litre)

Consumer b
90
surplus c
80 MU
70

60

50

40
0 250 500 750 1 000

fig
Q (litres per annum)
APPLICATIONS OF CONSUMER
SURPLUS
Designing government policies and
implementing welfare programs
Monopolist in fixing the price of a commodity
Advocates for international trade
Measure the health of an economy
Analysis direct and indirect tax burden
Made By :-
NANDAN THE GREAT