Module 1

Consumer Behaviour
 Unit 1
Theory of Consumer Behaviour
-

( consumer , .
Behaviour -
Consumer ,
Demand

;
.
,

: :

consumers )
:
.

Market

Consumers
Behaviour →
Demand Demand

onsumern
n
.

assumption under
( i

.
.

; .

:
.

( Behaviour →
Consumer Demand Traditional Demand

Theory developed demand 30%

.

Ideally ,
in economies
,
consumer is -

40%

total
of demand

Consumer is assumed to be Rational .

i. e. Given his / her income and market

commodities to
prices of various
,
helshe plans spend the income so as

to attain the highest possible satisfaction or

Utility . ( axiom
of utility
maximization )
Consumer is assumed to have
full knowledge of all
information relevant

to his / Consumer able to the

her decision .
is
compare utility ( satisfaction)
baskets be bought
'

of of goods /
'

various which can with his her income .

The
problem of Comparison of Utilities

% 1.
Cardinal ist approach Ordinalist approach
be not
Utility can Measured
Utility in measurable

Determination of Order
of Preference

/ \
Indifference -

curves approach Revealed Preference Hypothesis

 1.) The Cardinal
Utility Theory
terms
Utility is measured numerically in
of money
.
Consumer knows

what he and what amount

prefers by .

* Assumptions : -

Rational to their
i .

) Consumer is .
i. e. Consumers
always aim maximize
utility
at income and levels
a
given price .

cardinal terms
ii. )
Htility is ie .
can be measured
numerically in
of money .

constant
iii. Marginal utility of money
is .
Since
monetary unit is
being
used as a measure
of utility ,
it is
important that it be standard and

constant .

The
iv. Marginal utility is
diminishing in e.
utility gained from successive

diminishes In other
additional units
of a
commodity .
words ,
marginal
the
utility of a
commodity diminishes as consumer
acquires Larger

quantities of it .
-
Axiom
of diminishing marginal utility .

x. ) If the tastes and preferences are

given ,
total
utility of consumer depends

upon quantity of consumption .

Total the quantities of

utility of basket
'a of
'

vi. goods depends upon

commodities commodities
individual
If there bundle with
' '

.
are n in a

quantities ni , nz ,
n } . . ... nn ,
the total
utility is 1J =

f ( ni , nz . ...
nn )

* Consumer Equilibrium
simple model
of single commodity with having
' '

a n a consumer income
,

Y !
'

as

Consumer is in
equilibrium when the Marginal utility derived is equal to
the
price of commodity
i. e. MDN = Pm
 if the
marginal utility of than its
' '

n is
greater price ,
consumer can

his
welfare by purchasing units
of Similarly if the
'
increase
'
more n .
,

its his
utility of less than
' '

is
marginal n
price ,
consumer can increase

satisfaction by cutting down consumption of and retaining income

'
'

on n .

Therefore ,
maximization
of utility happens when Mbn =
Pn .

Derivation : -

Htility function is IJ =

fcqn) ,
where
utility is

measured in
monetary units .

If buys quantities of the expenditure qnpn

'
is
' ' '

a consumer
qn n
,

Since the rational the

tendency to the
consumer is
,
is maximize
difference
between Utility and expenditure .
i. e. maximize (Is -

qnpn )
condition maximization
Necessary for ,

2H-qnPn)_ =
0

jqn

ii. Pn 291 0
}q±n
=
.

2qn

.
'
. 2 -
Pn = 0

oqn

1 Pn
.

. .
=

oqn

MDN Pn
'

. .
=

if there are more commodities ,

condition
for equilibrium of consumer is

Mplnhn lybjbn Mpbnnn

. . . . i. i.
= = =

unit must be
The
utility derived
from spending an additional
of money
same

commodities
for all .

If a consumer derives
greater utility from any
one commodity
he his that until the
can increase
welfare by spending more on
commodity ,

above equilibrium condition is

fulfilled .
Derivation demand
of Consumer
from Consumer equilibrium
based on the aniom
of diminishing marginal utility .

r 70MIJNA
IJNA
"

slope Lines
indicate diminishing
marginal utility

1
7
°
n n
qn qn

total but
The
utility increases
,
at

a
decreasing rate , upto quantity 'n ;

and then starts declining and

becomes negative beyond

'
'
n .

the measured terms demand

since marginal utility is in
of monetary units ,
the

for equal to the positive segment of marginal utility

'
'
curve n is curve .

MIJNA 70pnt
MD , .
. .
.

P,

MIJZ . .

pz

1
7 1

n nz 0
m mi N2
,
qn m
qn

The
negative section
of Mls curve

does not the demand

form part of
do not
pay negative
curve
,
since we

for additional
price quantities .
 Issues with Cardinal approach

it The
satisfaction derived
from various commodities cannot be measured
objectively .

constant unrealistic
ii. The
assumption of utility of money
is .
As income

increases
,
the
marginal utility of money changes .
Thus
,
money
cannot be

used as a
measuring
rod as its own
utility changes with income levels .

of diminishing
anions for granted
introspection
has established
iii. The
marginal from utility been

it law which must be taken

,
is a
psychological .
 The Ordinal
2 .

Utility Theory
Utility is measured qualitatively ( not
numerically or
quantitatively )
Consumers can rank their preferences in desired order
(satisfaction
.

Being a
qualitative measure
,
it is more realistic measure
of utility

There two under ordinal

theory
are
different approaches .

it Indifferent curve approach

ii. Revealed preference approach

The Curves theory

it indifference
assumptions : -

Rational the
a.) Consumer is i. e. aims at maximization
of utility given ,
income

and market
prices .
Consumer has
full knowledge ( certain
ity ) of all

relevant
information .

enact amount
b}.

Htility is Ordinal in e Consumer need not know the

of
Helshe should be able to rank the preferences according to
satisfaction .

the each basket

satisfaction from .

substitution
c.) Diminishing marginal rate
of -

Preferences are ranked in

terms to be to the
of indifference curves
,
which are assumed convene

which the slope of

origin ,
means curve increases

The slope of indifference called the substitution

curve is
marginal
rate
of
of the commodities

based
The
indifference curve
theory is thus
upon
the aniom
of diminishing
substitution
marginal rate
of .

The total quantities of the

d.) utility of the consumer
depends on the

commodities consumed .
i. e. 1J
=f( q , qz ... ...

qn , qy ,
. . . .

qn )
e.) Consistency and
Transitivity of choice

It is assumed the customer is consistent in higher choice

i. e . even at
different times and situations , consumer will choose A'
'

over

B'
'

only
 Transitivity If chooses A' he
'
will
'

and B'
' '
' '

consumer over B over c

prefer
-

and not other round

' '

A'
'
over c
way
.

f) Consumer 's choice is

self guided
-
.