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Consumer Behaviour Consumer Behaviour AnalysisAnalysis
Consumer Behaviour Consumer Behaviour AnalysisAnalysis
Subhalaxmi MohapatraSubhalaxmi MohapatraDated:04.08.2011Dated:04.08.2011
KIAMSKIAMS
Index• Utility -Cardinal versus Ordinal utility• Total, average and Marginal Utility• Law of diminishing marginal utility
– Consumer equilibrium– Consumer surplus
• Indifference Curve and its properties– Budget line– Consumer equilibrium– Effect of change in income and prices
on consumer equilibrium– Price , Income and Substitution effect– Income consumption curve and Price
consumption curve
Utility• The want satisfying power of
commodity is utility.• Same commodity gives different
utility to different consumers.• Even for the same consumer, utility
varies from unit to unit, from time to time and from place to place.
• We measure utility in units called “utils”
MEASUREMENT OF UTILITY
Cardinal utility approach Ordinal utility approach
Cardinal Utility Approach
• Alfred Marshall (1890) introduced the Cardinal Utility Theory also known as Marshallian Utility Theory.
• Utility is subjective not objective
Total Utility• Meaning:
– amount of utility a person derives from the consumption of a particular product in a given period.
– The sum total of satisfaction which a consumer derives by consuming the various units of a commodity.
Marginal Utility• Defined as the change in total utility resulting from 1 unit
change in the consumption of the good. MU x = ΔTU x / Δ Qx
MU x -- Marginal utility
ΔTU x – change in total utility
Δ Qx –change in quantity of good X respectively
MU of nth Unit = TU n - TU n-1
• Another way of finding marginal utility is by differentiating total utility function:
MUx = dTU x / dQx
Total and Marginal Utility Schedules
Number of ice creams consumed at a stretch
Total utility
0
1
3
4
2
10
6
7
5
9
8
0.00
15.00
25.00
31.00
35.00
37.50
10.00
4.00
2.50
1.25
0.90
0.80
Marginal utility
39.00
40.25
41.30
42.20
43.00
15.00
6.00
1.05
1.5
2 4 6 8 10
10
20
30
40
50
Total and Marginal Utility Curves
[i]. Increasing total utility [ii]. Diminishing marginal utility
Quantity of ice creams consumed
15
10
5
Uti
lity
20
0
Uti
lity
2 4 6 8 100
The Law of Diminishing Marginal UtilityStatement
For any individual consumer the value that he attaches to successive units of a particular commodity will diminish steadily as his total consumption of that commodity increases, the consumption of all other goods being held constant. (R. G. Lipsey) The MU declines as a person consumes more of
any good. TU grows at a slower rate as the MU starts
diminishing with each additional unit consumed. The diminishing MU is a result of the fact that a
person’s enjoyment of a good decline as more and more of the good is consumed.
Assumptions1) Various units of the goods are homogeneous.2) No time gap between consumption of the different units3) Tastes, preferences and fashions remain unchanged4) Consumer is rational ( i.e has complete knowledge and maximizes utility)
If the above conditions holds good, law holds good universally.
Maximizing UtilityEquilibrium for one product: (consumption
of all other product remains constant)The consumer will adjust her purchases until the marginal utility of last unit purchased equal to the price of a unit of that product.
MU = P, Or, MU/P = 1Equilibrium for many products: (Equi
Marginal Utility)consumers allocate expenditure among products so that equal utility is derived from the last unit of money spent on each commodity.
MUx/Px = MUy/Py = -------------- =MUn/ Pn
Utility Maximizing Rule
• In general, utility maximizing consumer spread out their expenditure until the following condition holds:
(MU x / Px ) = (MU y/ Py)
• Another View:(MU x / MU y) = (Px / Py)
Consumer Surplus
The concept of consumer surplus was pioneered by Marshall.
According to him, “the excess of the price which a consumer would be willing to pay rather than go without a thing over which he actually does pay, is the economic measure of his surplus satisfaction.”
Thus, consumer surplus can be defined as the difference between what consumers would like to pay for a product and what they actually pay.
Ordinal Utility Theory: Indifference Curve Approach
Assumptions of the Theory
Rationality
Utility is Ordinal
Consistency
Transitivity
Non-satiety
What is an Indifference Curve (Equal Utility Curve)
• A curve that shows different combinations of two goods yielding the same level of utility (satisfaction) to the consumer
• Since all points on the curve yield equal satisfaction, the consumer likes equally all the combinations, and is thus indifferent between these combinations.
Bundle Clothing Food
c
a
b
d
e
f
30
18
13
10
8
7
5
10
15
20
25
30
Bundles Conferring Equal Satisfaction
5 10 15 20 25 30
10
20
30
35Quantity of food
Quanti
t y o
f c l
ot h
ing
per
week
An Indifference Curve
25
15
35
5
a
b
c
d e fh T I
g
An Indifference Map
A set of indifference curves is called an indifference map.
The further the curve from the origin, the higher the level of satisfaction it represents.
Properties of Indifference Curve
• Indifference curve is downward sloping
• Indifference curve is convex to the origin
• ICs can do not intersect each other
• The further away from the origin an IC lies, the higher the level of satisfaction it denotes
Marginal Rate of Substitution
The marginal rate of substitution of X for Y (MRSx,y ) is defined as the number of units of good Y that must be given up in exchange for an extra unit of goodX so that the consumer maintains the same level of satisfaction.
In other words, it shows the rate at which one good is substituted for another good, while remaining on the same indifference curve. Thus,
(slope of indifference curve) = -dY / dX = MRS x,y
Budget (Iso – Expenditure) Line
• A good is demanded by the consumer if he has (i) A preference for that good, and (ii) purchasing power to buy the good.
• His preference pattern is represented by a set of ICs,
• His purchasing power depends upon his money income and market prices of the goods.
Budget (Iso – Expenditure) Line (contd.)
Let the consumer has allocated some money to be spent on goods X and Y, whose prices are Px and Py , then his purchasing power can be represented in terms of a budget equation:
Y= Px Qx + Py Qy Budget line Equation
Where Y = Income or expenditure on goods X and Y
Qx and Qy = Quantity of good X and Y respectively
Px and Py = Prices of good X and Y respectively.The budget equation gives us a budget line.
Consumer equilibrium
Income and substitution effect
Substitution Effect:when the price of any product rises,
consumers substitute the product with a low priced product.
Income effect:change in price of a product has an effect
on the purchasing power of the customer. The decrease in the price enables to buy more of the same commodity or some other. Hence, the quantity demanded increases
I2
I3
I1
E2
An Income-consumption Line
Quantity of food per week
Qu
anti
ty o
f cl
oth
ing
per
week
E3
E1
Income-consumption line
0
I2
I3
I1
E2
The Price-consumption Line
Quantity of food per week
Qu
anti
ty o
f cl
oth
ing
per
week
E3
E1
Price-consumption line
b c d
a
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