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Consumer Behavior 1234

The document discusses consumer behavior, focusing on concepts such as consumer equilibrium, utility, total utility, and marginal utility. It explains how consumers maximize satisfaction within their budget constraints and outlines the law of diminishing marginal utility. Additionally, it covers the properties of indifference curves and their implications for consumer preferences and choices.

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nishitan505
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6 views

Consumer Behavior 1234

The document discusses consumer behavior, focusing on concepts such as consumer equilibrium, utility, total utility, and marginal utility. It explains how consumers maximize satisfaction within their budget constraints and outlines the law of diminishing marginal utility. Additionally, it covers the properties of indifference curves and their implications for consumer preferences and choices.

Uploaded by

nishitan505
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CONSUMER BEHAVIOR

CONSUMER EQUILIBRIUM

Refers to a situation in which a consumer spends his income on the


purchase of a commodity in such a way that gives him maximum
Satisfaction

Meaning of utility

The utility is the want-satisfying power of a commodity. It refers to the


amount of Satisfaction a consumer receives from consumption of a good
or service. It is assumed to be measured in terms of cardinal numbers,
such as 1, 2, 3, 4 etc. These numbers are called Utiles or unit of utility

TOTAL UTILITY

It is the sum total of utility derived from the consumption of all the
units of a commodity. If two units of a commodity are consumed and the
first unit yields the satisfaction of a 10 utile, while the second unit yield
satisfaction of nine utiles then total utility is equal to 10 utiles + 9 utiles=
19 utiles

Total Utility = ΣMU

SCHEDULE

Units of Consumed Total Utility


1 10
2 18
3 24
4 28
5 30
6 30

CONSUMER BUDGET

The fixed amount of money available to spend on goods, the prices of


which are given in the market.
BUDGET SET

The collection of all bundles that consumers can buy with their income
at the prevailing market prices.

BUDGET LINE

A budget line is a line which represents all bundles which cost exactly
equal to his entire income. It is negatively sloping. Any point on the
budget line represents a combination of two goods that exhaust the
entire income.

Good2

M
P2 px1+p2x2=M

M X
P1 Good1

MONOTONIC PREFERENCES

A consumer’s preference is monotonic if and only if between any two


bundles which have more of at least one of the goods and no less of the
other goods.

Total

Utility

X
Consumption of Commodity
MARGINAL UTILITY
It refers to the additional utility on account of the consumption of an
additional unit of a commodity. If 10 units of a commodity yield
satisfaction of 100 utils and 11th unit of a commodity yield satisfaction of
105 utils, then additional utility on account of the consumption of the
11th unit of a commodity is 5 utility. This is called marginal utility.

MU = OR MUn = TUn – TUn-1

SCHEDULE

Units consumed Marginal utility


1 10
2 8
3 6
4 4
5 2
6 0

Marginal
Utility

0 MV X
Consumption of Commodity

The Law of diminishing marginal utility

The law of diminishing marginal utility states that as more and


more unit of a commodity are consumed marginal utility derived from
every additional unit must decline. It happens in respect of all goods and
services.
ASSUMPTIONS

(i) Only standard units of the commodity are consumed, e.g. Like a
cup of tea and not a spoon of tea
(ii) Consumption of a commodity is continuous

EXPLANATION OF LAW

On the basis of the law’s assumptions, this law can be explained


with the help of a schedule and the diagram.

SCHEDULE

Units of oranges consumed Marginal utility

1 8

2 6

3 4

4 2

5 0

6 -2

MU 6

0 1 2 3 4 5 6 X

Unit of Oranges
According to the schedule and the diagram, when consumer
consumes more and more units of oranges, its marginal utility
decreases. In the beginning,, marginal utility is 8, it keeps on
declining on the consumer consumes more and more of it marginal
utility becomes zero at the units 5th and at 6th it is negative 2

Consumers Equilibrium
Consumer equilibrium refers to the optimum choice of the consumer.
It is achieved when he maximised his satisfaction, spending his given
income on different goods and services. In terms of difference curve
analysis, the consumer achieves his optimum choice. When he strikes
a balance between what he wishes to buy according to his tastes and
preferences and what he can buy according to his budget and the
market price of the goods he intends to buy.

Diagrammatically, the consumer achieved his equilibrium when the


slope if IC is equal to the slope of the price line.

60 A

50

GoodY 40

30 .Q

20 IC1

10 B

0 10 20 30 40 X
Good X

According to the diagram, equilibrium strikes at point ‘Q’ here. Price


line AB is tangent to IC the point of tangency shows that the slope of
IC is equal to slope of price line i.e. MRSxy is equal to . Thus at the
point of equilibrium MRSxy = . The consumer maximizes his
satisfaction when he buys 30 units of goods y and 20 units of x.
Diminishing Rate of Substitution

This is the rate at which one unit of good will be foregone for
gaining one unit of another good. When the consumer has more and
more of a particular commodity, the intensity of his wants for that
commodity goes on declining.

From the diagram, the consumer is ready to give-up Δy for Δx in the


beginning, but subsequently, he is ready to give-up Δy, unit of y for x, a
unit of x.

Slope of indifference curve

Indifference curve slopes downward to the right. It is convex to the


origin the point A, B, C & D on the IC, indicate different combinations
of two goods and they all give the same level of satisfaction. Therefore
the consumer is indifferent to any of the bundles. Given IC, represent
a particular level of satisfaction, any IC above the IC1 shows a higher
level of satisfaction.

Indifference map:The consumers’ references over all the bundles can


be represented by a family of indifference curve or the map of the
indifference curve.
Y

G2

IC3

IC2

IC1

G1 X

Properties of Indifference curves


a) Indifference curves are downward sloping.
A consumer would be indifferent between bundles if these contain more
of one good and less of the other. Since total utility is constant on a given
indifference curve, if some amount of one good is taken away, the
consumer must be compensated by other good so that utility remains
constant.
b) Indifference curves do not intersect.
If indifference curves intersect with each other than it will not reflect
higher utility from the higher indifference curve, i.e. bundles lying on a
higher indifference curve cannot be preferred to bundles lying on lower
indifference curves.
c) A higher indifference curve indicates a higher level of
satisfaction.
Every indifference curve to the right or at a higher level indicates a
higher level of satisfaction.

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