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Theory of Consumer Behaviour- Dr.KALEESHWARI.S
- 1. UNIT 2 By Ms.KALEESHWARI.S Assistant Professor Departmentof Management Kristu Jayanti University, Bangalore
- 2. Unit 2: Theoryof Consumer Behaviour Consumer behaviour; consumer sovereignty; limitations; approaches to the study of consumer behaviour: cardinal approach, the law of equi-marginal utility, ordinal approach, indifference curve analysis; consumer surplus (Marshall).
- 4. Consumer Behaviour In economics,consumer behaviour studies how consumers allocate limited resources like money and time to buy goods and services to satisfy their needs and wants, aiming to maximize their satisfaction (utility). This multidisciplinary field analyzes the mental and physical activities, motivations, and external influences (such as price, income, and social factors) that drive purchasing decisions, and forms the foundation for understanding market demand and forecasting trends.
- 5. THE CONSUMER BUDGET Theconsumer cannot buy any and every combination of two goods that she wants to consume. The consumption bundles that are available to the consumer depend on the following factors (A)Income of the consumer (B)Prices of the two goods. Given fixed income and prices of two goods, the consumer can buy only those bundles which cost less than or equal to income.
- 6. BUDGET SET A setof bundles available to the consumer is called the Budget Set. “It is a collection of all bundles that the consumer can buy with her income at the prevailing price in the market. Let us assume that the income of consumer M Prices of the two goods go is P1 and P2. suppose wants to buy X1, units of good 1 and X2 units of good 2. In this situation, the consumer has to spend P1X1 + +P2X2 amount of money. Given the prices of two goods and the income of the consumer, she can select any bundle that costs less than or equal to her income. In other words, the consumer can buy any bundle Such that P1X1+P2X2 = or Less that M
- 7. BUDGET LINE A budgetline is a graph showing all possible combinations of two goods a consumer can afford to buy, given their income and the prices of those goods. It's a downward-sloping, straight line where every point on the line represents spending the entire income. The slope of the budget line shows the rate at which one good must be given up to get more of the other, which is equal to the ratio of the prices of the two goods.
- 9. A change inthe price of one good pivots the budget line, altering its slope and maximum purchasing power for that specific good while keeping the other good's maximum consumption unchanged. A price decrease causes an outward pivot, while a price increase causes an inward pivot, making the budget line steeper or flatter, respectively. If the prices of both goods change by the same amount, the budget line shifts in a parallel manner, similar to an income change.
- 11. • How aprice change affects the budget line: • Price of one good changes: • price decrease: The budget line pivots outward along the axis of that good. For instance, if the price of good X decreases, the budget line pivots outwards on the X-axis, showing that more of good X can be purchased with the same income. The slope of the budget line becomes flatter. • price increase: The budget line pivots inward on the axis of that good. The slope becomes steeper, indicating that the consumer must give up more of the other good to buy the now more expensive one. • Price of both goods changes: • Prices decrease: The budget line shifts outward in a parallel manner, as the consumer can afford more of both goods. • Prices increase: The budget line shifts inward in a parallel manner, as the consumer's purchasing power is reduced for both goods.
- 13. consumer sovereignty • Ineconomics, consumer preference describes a consumer's subjective tastes and choices for different goods and services, reflecting their inherent satisfaction or utility. It's a fundamental concept for understanding economic decisions, often analyzed through utility functions and indifference curves, and influenced by factors like income, prices, habits, advertising, and social context.
- 14. The Cardinal Approachto the theory of consumer behaviour is based upon the concept of utility. It assumes that utility is capable of measurement. It can be added, subtracted, multiplied, and so on. According to this approach, utility can be measured in cardinal numbers, like 1,2,3,4 etc.
- 15. The Ordinal Approachis developed by Hicks & Allen. Its also called Indifference curve analysis. In ordinal approach the consumer compares the satisfaction from different combination of goods
- 16. PREFERENCES BE THECONSUMER The budget set consists of all bundles that are available to consumers. The consumer chooses her bundle one based on taste and preference. Monotonic Preference: A consumer’s preferences are monotonic between any two bundles the consumer prefers a which has more of at least one of the goods and no less of the other goods, as compared to another bundle. Substitution between Goods: The rate of substitution is the amount of good 2 that the consumer is willing to give up for an extra unit of good 1.
- 17. DIMINISHING RATE OFSUBSTITUTION The Rate of substitution reduces between goods because the consumer’s willingness to pay for good, in terms of good 2, will decline as she has more units of good 1.
- 18. INDIFFERENCE CURVE • Thecurve always slopes downward from left to right • A higher indifference curve represents a higher level of satisfaction • They are convex to the origin. • They don’t intersect with each other. • Points above the indifference curve represent the bundles represents bundles that are preferred to bundles represented by points on the indifference curve. • Bundles represented by points on the indifference curve will be preferred to the bundles below the indifference curve.
- 19. An indifference curvejoins all points representing bundles which are considered different by the consumers
- 21. MARGINAL RATE OFSUBSTITUTION • The Marginal Rate of Substitution (MRS) is the maximum amount of one good that a consumer is willing to give up for one additional unit of another good while maintaining the same level of total satisfaction (utility). It is often represented by the slope of an indifference curve at a specific point. The MRS typically decreases as a consumer consumes more of a good, a phenomenon known as the diminishing marginal rate of substitution, due to the law of diminishing marginal utility.
- 22. SHAPE OF THEINDIFFERENCE The shape of an indifference curve varies depending on the consumer's preferences for the two goods, but it is typically convex to the origin, reflecting a diminishing marginal rate of substitution. However, if the goods are perfect substitutes, the curve is a straight line, and if they are perfect complements, the curve takes an L-shape.
- 23. Utility • It isa power or capacity of a commodity to satisfy a human’s wants. It is measured in utils. Marginal Utility • It is the additional utility derived from the consumption of an additional unit of a commodity. In the form of an equation MU= TU/Q
- 24. Total Utility It isa total psychological satisfaction derived by the consumer from consuming a product or a given amount of a particular commodity. It is a sum of marginal utility. TU= sum of Mus Tu = ∑ MUs
- 25. Relationship Between Tuand Mu • The relationship between Tu and Mu. The Tu increases along with Mu as long as Mu is positive. • Tu is maximum when Mu is Zero “0”. • Tu starts declining when Mu becomes Negative. • This relationship is further clarified with the help of a table and a diagram.
- 26. Units MU UtilsTU Utils - - 1 10 10 2 8 18 3 5 23 4 2 25 5 1 26 6 0 26 7 -3 23
- 28. Law of Diminishingutility According to this law, “ as more and more units of a commodity are consumed, the marginal utility derived from additional units goes on falling.
- 29. Consumer Utility Equilibrium •Consumerequilibrium is how many of units of goods that the consumer buys. The consumer equilibrium is obtained when the condition that the marginal utility in terms of money is equal to the price.
- 30. A consumer reachesequilibrium when the marginal utility (MU) of the good, measured in terms of money, is exactly equal to the price (P) of that good. The condition is expressed as MUx = Px. This means the satisfaction from the last unit consumed is worth its price.
- 31. Consumer Equilibrium toIndifference Curve or Optimal choice of the consumer
- 32. Consumer Equilibrium inthe case of a Single Commodity In the case of a single commodity, the consumer strikes his equilibrium Mux/Px=Mum • Purchase of a commodity by a consumer depends upon three factors: • Price of the commodity • Marginal Utility of the commodity • Marginal Utility of Money
- 33. • Let theprice of the commodity be Rs.4 . Let the commodity be X, Marginal utility of money 4 utils. • The marginal utility schedule of commodity X is given below: • Mux/Px = Mum Unit of X MUx 1 20 2 18 3 16 4 10 5 0 6 -5
- 34. When the consumerconsumes the first unit of the commodity, he is not in equilibrium because less than the satisfaction he derives (20/4 = 5); in this way, he may be in equilibrium by consuming the second unit of the commodity (18/4 =4.5). The consumer strikes equilibrium when he consumes the third unit of the product (16/4=4) because the marginal utility of the product divided by the price is equal marginal utility of money, i.e, Mux/Px=Mum
- 35. Consumer Equilibrium inthe case of Two Commodities • Consumer equilibrium in the purchase of two commodities obtained • When – Mux/PX = Muy /Py= Mum • In case of two goods consumer obtains equilibrium when he spends his limited income in such a way that the marginal utilities of both the goods are equal (Mux = Muy). • Suppose a consumer with Rs.5 (Income) wants to spend on two goods (x and y), the price of each good is Re.. 1. His utility schedule of two goods is shown below:
- 36. Rs. Spend MUof X utils Mu of Y utils 1 10 9 2 8 6 3 6 4 4 4 2 5 2 1
- 37. • To getmaximum total utility, the consumer will spend on X and second on Y and third on X, fourth on Y, and fifth on X. Spending this way, he gets maximum utility (total utility 10+9+8+6+6). • If he spends his income in any other order. the total utility will be less than 39 utils. • In case the two commodities consumer obtains equilibrium, then the marginal utilities of both the goods are equal (Mux=Muy) • assuming the price of the two goods is the same. • If the prices of the two goods are different than the consumer strikes his equilibrium when Mux/Px = Muy /Py =MUm Pa