Consumer Behaviour is the study of how individual customers, groups or organizations select, buy, use, and dispose ideas, goods, and services to satisfy their needs and wants. It refers to the actions of the consumers in the marketplace and the underlying motives for those actions. The study of Consumer Behaviour assumes that the consumers are actors in the marketplace.
2. Contents
Introduction
Marginal Utility Analysis, Law of marginal
utility graphical representation
Ordinal Utility and Cardinal Utility Approach
Concept of Consumer Behavior – Budget Line
and Budget Set
Indifference Curve Analysis:- Meaning, Map
and Properties
Consumer's Equilibrium Marginal rate of
substitution
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3. Introduction
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The purpose of the theory of demand is to determine the various
factors that affect demand.
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Determinants:
1. The price of the commodity
2. Other prices
3. Income
4. Tastes
5. Income distribution
6. Total population
7. Wealth
8. Government policy
4. Introduction
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• The traditional theory of demand emphasis on consumer’s
demand for durable and non-durable goods.
• It does not deal with investment goods.
• It is only a fraction of the total demand in the economy as a
whole.
• The market demand is assumed to be the summation of the
demands of individual consumers.
• If a consumer gets more utilities from a commodity, he would
be willing to pay a higher price and vice-versa.
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5. Definitions:
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1. Utility: Utility is wants satisfying power of a commodity
which varies from person to person. The concept of utility is
ethically neutral as harmful and useful things are both
considered. The value-in-use of a commodity is the satisfaction
which we get from the consumption of a commodity.
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2. Marginal utility: The additional utility derived from additional unit
of a commodity. It refers to net addition made to the total utility by the
consumption of an extra unit of a commodity.
3. Total utility: The sum of utility derived from the different units of a
commodity consumed by a consumer. The amount of utility derived from
the consumption of all units of a commodity which are at the disposal of
the consumer.
6. Marginal Utility Analysis
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This theory is formulated by Alfred Marshall, a British
Economist, seeks to explain how a consumer spends his income
on different goods and services so as to attain maximum
satisfaction.
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7. Marginal Utility Analysis
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Assumptions of utility analysis:
1. Utility is based on the cardinal concept.
2. Utility is measurable and additive of goods.
3. The marginal utility of money is assumed to be constant.
4. The hypothesis of independent utility.
5. The consumer is rational.
6. He has full knowledge of the availability of commodities and
their technical qualities.
7. Possesses perfect knowledge of the choice of commodities.
8. There are no substitutes.
9. Utilities are not influenced by variations in their prices.
10. The theory ignores complementary between goods.Part 6
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8. Law of diminishing marginal utility
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The law of marginal utility is based on the human wants. The
law was first developed by German Economist H.H Gossen
which is known as “Gossen’s First law”. Later it was
popularized by Prof. Alfred Marshall.
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“The additional benefit which a person
derives from a given increase of his
stock of a thing diminishes with every
increase in the stock that he already
has”. - Alfred Marshall
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9. Law of diminishing marginal utility
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Assumptions:
1. Tastes, preferences, etc of the customer remain constant.
2. Income of the consumer also remain constant
3. Units of the goods are identical or similar
4. The process of consumption is continuous.
5. Units of the goods are not very small in size.
Importance:
1. Framing taxation policy by the government.
2. Useful to consumer to regulate his expenditure.
3. Useful to monopolist producer in fixing the prices of his
products.
4. Basis for law of demand.
5. Differentiate value-in-use and value-in-exchange.Part 6
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10. Law of diminishing marginal utility
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Explanation of the law
•Suppose a person consumes the first apple, he derives the
highest level of utility and the intensity of his desire declines.
•If he consumes the second apple, he will get lesser satisfaction
than first apple.
•The utility that he gets from the third apple will be still less.
•If he continues to consume more and more apples, utility from
each apple goes on diminishing as the intensity of his desire goes
on diminishing.
Thus, the law of diminishing marginal utility simply tells us that
we obtain less and less marginal utility from the successive units
of a commodity as we consume more and more of it
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11. Graphical representation
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Units of
apple
consumed
Total
utility
Margin
al
utility
1 8 8
2 13 5
3 16 3
4 18 2
5 18 0
6 15 -3
8
13
16
18 18
15
8
5
3
2
0
-3
-5
0
5
10
15
20
1 2 3 4 5 6
DiminishingMarginal Utility
Units of apple consumed
Utility
TU
MU
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12. Explanation to the graph
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•The Total Utility (TU) declines in positive rate but the
Marginal Utility (MU) declines in a negative rate.
•Total utility rises by smaller amounts.
•The negative slope of the marginal utility curve reflects
the law of diminishing marginal utility.
•Saturation point is when the total utility is unchanged.
•Marginal utility declines from larger to smaller units.
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13. Limitations
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1. Different units consumed must be identical and the
habit, taste, income and treatment of the consumer
also remain unchanged.
2. Different units consumed should be standard units.
3. Continuous consumption. I.e. no gap between two
consumption of one unit and another unit.
4. Law does not apply to articles like gold, cash,
money, music, hobbies,
5. The shape of the utility curve may be affected by
the presence or absence of articles which are
substitutes to it.
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14. Conclusion
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Utility reflects the tastes of a particular
individual, uniqueness to the individual and
reflects his or her own particular subjective
preferences and perceptions. Utility remain
unchanged so long as the individual’s tastes
remain the same.
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15. Ordinal and cardinal approach
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In order to attain this objective the consumer must be able to
compare the utility of the various commodities which can buy
with his income. There are two basic approaches to the problem
of comparison of utilities:
1. Cardinal approach 2. Ordinal approach
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16. Ordinal and cardinal approach
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1. Ordinal approach: The ordinalist school postulated that
utility is not measurement, but is an ordinal magnitude. The
consumer need not know in specific units the utility of various
commodities to make his choice.
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It is needed for him to rank the various
commodities. He must be able to determine his
order of preference among the different bundles
of goods.
The main ordinal theories are the
indifference-curves approach and the
revealed preference hypothesis.
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17. Ordinal and cardinal approach
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2. The cardinal approach The cardinalist school postulated
that utility can be measured. Various suggestions have been made
for the measurement of utility.
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Under certainty of full knowledge about
the market conditions and income levels,
some economists have suggested that
utility can be measured by monetary
units; utils, by the amount of money the
consumer is willing to sacrifice for
another unit of a commodity.
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18. Ordinal and cardinal approach
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Ordinal Utility Cardinal Utility
Consumption can’t be measured Consumption can be measured
Utility is used for grading/ranking of
the products depending on the
preferences of the consumer
Uses utils which help in
understanding how much utility is
derived from consumption of a
product.
Much less compared Comparative study
Conceptual and practical Preceded the ordinal approach
Convex function Concave function
Qualitative measure Quantitative measure
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19. Conclusion
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Satisfaction from the consumption
of a combination of goods and
services
Satisfaction through consumption
of one good at a time.
Comparisons can be made of the
utility derived from two products,
but the utility cannot be computed
quantitatively.
Focuses on the independent utility
derived from a product
The ordinal approach will give a
sense of preferences, likes and
dislikes but there is no numerical
measurement and this approach is
used in grading the preferences of
the consumer depending upon the
alternatives that are available to
him/her.
Though this approach brings out
the preference of one product over
other through utils but this does
not imply any conclusion or relation
between the choices
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20. Concept of consumer behaviour:
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• Consumer behaviour is the study of how individual customers,
groups or organizations; select, buy, use, and dispose ideas,
goods, and services to satisfy their needs and wants.
• It refers to the actions of the consumers in the marketplace
and the underlying motives for those actions.
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"Consumer behaviour is the decision process and
physical activity, which individuals engage in when
evaluating, acquiring, using or disposing of goods and
services". - Louden and Bitta
21. Nature of Consumer Behaviour
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1. Influenced by various factors:
Factors which influence consumer behaviour:
Marketing factors such as product design, price, promotion,
packaging, positioning and distribution.
Personal factors such as age, gender, education and income
level.
Psychological factors such as buying motives, perception of
the product and attitudes towards the product.
Situational factors such as physical surroundings at the time
of purchase, social surroundings and time factor.
Social factors such as social status, reference groups and
family.
Cultural factors, such as religion, class, caste & sub-castes.Part 6
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22. Nature of Consumer Behaviour
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2. Consumer behavior is not static
3. Varies from consumer to consumer
4. Varies from region to region and country to county
5. Information on consumer behavior is important to
the marketers:
Factors for marketing decisions:
a) Product design/model b) Pricing of the product
c) Promotion of the product d) Packaging
e) Positioning f) Place of distribution
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23. Nature of Consumer Behaviour
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6. Leads to purchase decision
7. Varies from product to product
8. Improves standard of living
9. Reflects status of a customer
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24. Budget line:
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•A higher indifference curve shows a higher level of
satisfaction than a lower one.
• A consumer in his attempt to maximise satisfaction will try to
reach the higher possible indifference curve.
• In pursuit of buying more and more goods, he will obtain more
and more satisfaction.
It includes two constraints:
1. He has to pay the prices for the goods
2. He has a limited money income with which to purchase
the goods.
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25. Budget line
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• A budget line shows all those combinations of two goods.
• The consumer can buy spending his given money income at
their given prices.
• All those combinations which are within the reach of the consumer will
lie on the budget line.
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8
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4 8 12 16 20 24 28 32 36 40
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Consumer Budget states the
real income or purchasing
power of the consumer from
which he can purchase certain
quantitative bundles of two
goods at given price.
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26. Key points for Budget line
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1. A Budget line separates what is affordable from what is not
affordable
2. Budget line slopes downwards as more of one good can be
bought by decreasing some units of the other good.
3. Bundles which cost exactly equal to consumer’s money
income lie on the budget line.
4. Bundles which cost less than consumer’s money income
shows under spending. They lie inside the budget line.
5. Bundles which cost more than consumer’s money income are
not available to the consumer. They lie outside the budget
line.
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27. Budget set
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A budget set or opportunity set includes all possible consumption bundles
that someone can afford with given the prices of goods and the person's
income level. The budget set is bounded above by the budget line.
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According to the graph
•Good X and good Y are the two
commodities.
•PQ is the budget constraint or
budget line.
•The possible consumption bundles
of X and Y are represented as A, B,
C, D, E, F are within or on the
budget constraint.
•If the combination of goods are
above the budget constraint, it is not
taken into consideration.
GoodY
Good X
0
F
C
B
E
A
D
Budget set
X
Y
Budget line
P
Q
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28. Indifference Curve Analysis
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• A very popular, easier and scientific method of explaining
consumer’s demand is the indifference curve analysis.
• This approach to consumer behaviour is based on consumer
preferences.
• Human satisfaction is psychological phenomenon which
cannot be measured in terms of monetary terms.
• This approach is more realistic to order preferences.
• Consumer preference approach is therefore an ordinal concept
based on ordering of preferences compared with Marshall’s
approach of cardinality.Part 6
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29. Indifference Curve Analysis
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Indifference curve
An indifference curve is the locus of points- particular
combinations or bundles of goods- which yield the same utility
(level of satisfaction) to the consumer, so that he is indifferent
as to the particular combination he consumes.
In other words, an indifference curve is a graph showing
combination of two goods that give the consumer equal
satisfaction and utility. Each point on an indifference curve
indicates that a consumer is indifferent between the two and all
points give him the same utility.
U = F(X, Y) = K
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30. Indifference Curve Analysis
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Assumptions of an
indifference curve:
1. Rational consumers.
2. Two commodities
3. Utility is ordinal
4. Diminishing marginal rate of
substitution
5. Total utility of the consumer
depends on the quantities of
the commodities consumed.
6. Consistency and transitivity
of choicePart 6
Properties of an
indifference curve:
1. Negative downward slope
2. Further away from the
origin an indifference curve
lies.(Higher Indifference
curves represent higher
levels of satisfaction)
3. Indifference curve does not
intersect
4. Convex to the origin.
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31. Indifference Curve Analysis
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Part 6 Quantity of Good A
0
X
Y
QuantityofGoodA
U3
U2
U1
( , )
The equation of indifference curve is:
( , )
where is a constant.
The total differential of utility function is:
( ) ( )
U f x y
U f x y k
k
U U
dU dy dx MUy dy MUx dx
y x
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32. Indifference Curve Analysis
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0
X
Y
All
combinations
of X and Y below
the curve are inferior to
those combinations on
or above the curve
A level of Utility is associated with each
Indifference Curve.
All combinations of X and Y above
the curve are preferable to
combinations along ow belove the
curve The individial is
Indifferent between
all combinations of
X and Y along the
curve
A
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33. Indifference Curve Analysis
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Combi-
nation
Food Clothing MRS
A 1 12 0
B 2 6 6
C 3 4 2
D 4 3 1
Utility obtained
from point
A,B,C,D are same
Convex to the origin
0
X
Y
Clothing
12
10
8
6
4
2
1 2 3 4 5 6
A
B
C
D
IC
Food
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34. Indifference map
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Map shows all the indifference curves which rank the preferences
of the consumer.
Combinations of goods
situated on an
indifference curve yield
higher level of satisfaction
and are preferred.
Combinations on the
lower indifference curve
yield a lower utility.
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35. Marginal Rate of Substitution
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MRS is the rate at which the consumer is prepared to exchange
goods X and Y. Under the standard assumption of
0
X
Y
Clothing
12
10
8
6
4
2
1 2 3 4 5
Food
D
A
B
C
-6
-2
-1
1
1
1
MRS=6
MRS=1
Neo-classical Economics, the
goods and services are:
• Continuously divisible
• The marginal rates of
substitution will be the same
regardless of direction of
exchange
• It will correspond to the slope
of an indifference passing
through the consumption
bundle.
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36. Marginal Rate of Substitution
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Explanation of law
•A person consumes1 unit of food and 12 units of clothing.
• Then, he gives up 6 units of clothing to get an extra unit of food,
his level of satisfaction remaining the same. The MRS is 6.
• Hence, He moves from B to C and from C to D in his
indifference schedule, the MRS is 2 and 1 respectively.
• MRS of X for Y as the amount of Y whose loss can just be
compensated by a unit gain of X, the level of satisfaction remains
the same.
• As the consumer have more and more units of food; he is
prepared to give up less and less units of cloths. Thus MRS is
diminishing.
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37. Optimal choice of the consumer/
Consumer’s equilibrium
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After attaining the stage of indifference curve and budget
constraint, consumer has to reach equilibrium position.
A consumer derives maximum possible satisfaction from the
goods at equilibrium position.
A consumer cannot rearrange his purchase of goods at that level.
Assumptions:
1. The consumer has given indifference map which shows his
scale of preferences for various combinations of two goods X and Y.
2. He has a fixed money income which he has to spend wholly on
goods X and Y.
3. The prices of goods X and Y are given fixed for him.Part 6
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38. Part 2
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The customer’s aim is to reach
highest indifference curve which
maximises his satisfaction.
R or H lies on a lower
indifference curve IC1,
S or T lies on a lower
indifference curve IC2,
Whereas IC4 and IC5 are
beyond the consumer’s money
income.
According to the graph:
• IC1, IC2, IC3, IC4, IC5 are the indifference curves
• PL is the budget line for goods X and Y.
• Combinations R, S, Q, T, H cost the same.
IC5
IC4
IC3
IC2
IC1
X
Y
R
S
Q
T
H
P
L
N
M0
Consumer’s equilibrium
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39. Consumer’s equilibrium
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Utility maximisation rule:
if buy more of ' '
if buy more of ' '
MUx MUy
Px Py
MUx MUy
x
Px Py
MUx MUy
y
Px Py
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“Consumer
will decide Q
as the best
choice which
lies on the
budget
line and also
puts him on
highest
possible
indifference
curve IC3”.
40. Consumer’s equilibrium
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Conclusion:
• Thus the consumer will be at equilibrium at point Q on
IC3.
• The consumer will buy OM of X and ON of Y.
•Since there is a budget constraint, he will be forced to
remain on the given budget line.
• He will have to choose only combinations which lie on
the given price line.
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