3consumer Behaviour Presentation

8/4/2019 3consumer Behaviour Presentation

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Consumer Behaviour Analysis

Subhalaxmi MohapatraDated:04.08.2011

KIAMS


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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


Effect of change in income and priceson consumer equilibrium

Price , Income and Substitution effect

Income consumption curve and Price

consumption curve


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Utility The want satisfying power of commodity

is utility. Same commodity gives different utility

to different consumers.

Even for the same consumer, utilityvaries from unit to unit, from time totime and from place to place.

We measure utility in units called utils


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MEASUREMENT OF UTILITY

Cardinal utility approach

Ordinal utility approach


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Cardinal Utility Approach

Alfred Marshall (1890) introducedthe Cardinal Utility Theory also

known as Marshallian Utility Theory.

Utility is subjective not objective


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Total Utility

Meaning: amount of utility a person derives fromthe consumption of a particular productin a given period.

The sum total of satisfaction which aconsumer derives by consuming thevarious units of a commodity.


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Marginal Utility Defined as the change in total utility resulting from 1 unit

change in the consumption of the good.MU x = TU x / Qx

MU x -- Marginal utilityTU

x change in total utility

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 differentiatingtotal utility function:

MUx = dTU x / dQx


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Total and Marginal Utility Schedules

Number of ice creamsconsumed 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


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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

20

0 2 4 6 8 100


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The Law of Diminishing Marginal Utility

Statement

For any individual consumer the value that he attachesto successive units of a particular commodity willdiminish steadily as his total consumption of thatcommodity increases, the consumption of all other goodsbeing held constant. (R. G. Lipsey)

The MU declines as a person consumes more of anygood.

TU grows at a slower rate as the MU starts diminishingwith each additional unit consumed.

The diminishing MU is a result of the fact that apersons enjoyment of a good decline as more and moreof the good is consumed.


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Assumptions1) Various units of the goods are

homogeneous.2) No time gap between consumption ofthe different units3) Tastes, preferences and fashionsremain unchanged4) Consumer is rational ( i.e has completeknowledge and maximizes utility)

If the above conditions holds good, law holdsgood universally.


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Maximizing UtilityEquilibrium for one product: (consumption of all

other product remains constant)The consumer will adjust her purchases until themarginal utility of last unit purchased equal tothe price of a unit of that product.

MU = P, Or, MU/P = 1Equilibrium for many products: (Equi MarginalUtility)consumers allocate expenditure among products

so that equal utility is derived from the last unitof money spent on each commodity.

MUx/Px = MUy/Py = -------------- =MUn/ Pn


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Utility Maximizing Rule

In general, utility maximizingconsumer spread out their

expenditure until the followingcondition holds:

(MU x / Px ) = (MU y/ Py)

Another View:

(MU x / MU y) = (Px / Py)


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Consumer Surplus

The concept of consumer surplus was pioneered byMarshall.

According to him, the excess of the price which a

consumer would be willing to pay rather than gowithout a thing over which he actually does pay, is theeconomic measure of his surplus satisfaction.

Thus, consumer surplus can be defined as thedifference between what consumers would like to payfor a product and what they actually pay.


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Ordinal Utility Theory:Indifference Curve Approach


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Assumptions of theTheory

Rationality

Utility is OrdinalConsistency

Transitivity

Non-satiety


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What is an IndifferenceCurve (Equal Utility Curve)

A curve that shows different combinationsof two goods yielding the same level ofutility (satisfaction) to the consumer

Since all points on the curve yield equalsatisfaction, the consumer likes equally allthe combinations, and is thus indifferent

between these combinations.

B dl C f i E l i f i


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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

An Indifference Curve

25

15

35

5

a

b

c

d e fh T I

g


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An Indifference Map

A set of indifference curves is calledan indifference map.

The further the curve from theorigin, the higher the level ofsatisfaction it represents.


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Properties of IndifferenceCurve

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 IClies, the higher the level of satisfaction itdenotes


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Marginal Rate ofSubstitution

The marginal rate of substitution of X for Y(MRSx,y ) is defined as the number of units ofgood Y that must be given up in exchange for anextra unit of goodX so that the consumermaintains the same level of satisfaction.

In other words, it shows the rate at which onegood is substituted for another good, whileremaining on the same indifference curve. Thus,

(slope of indifference curve) = -dY / dX = MRS x,y


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Budget (Iso Expenditure) Line

A good is demanded by the consumer ifhe has (i) A preference for that good,and (ii) purchasing power to buy thegood.

His preference pattern is representedby a set of ICs,

His purchasing power depends upon hismoney income and market prices of thegoods.


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Budget (Iso Expenditure) Line (contd.)

Let the consumer has allocated some money to

be spent on goods X and Y, whose prices are Pxand Py , then his purchasing power can berepresented in terms of a budget equation:

Y= Px Qx + Py Qy Budget line Equation

Where Y = Income or expenditure on goods Xand Y

Qx andQy = Quantity of good X and Yrespectively

Px and Py = Prices of good X and Y respectively.The budget equation gives us a budget line.


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Income and substitution effect

Substitution Effect:when the price of any product rises,

consumers substitute the product with a lowpriced product.

Income effect:

change in price of a product has an effect onthe purchasing power of the customer. The

decrease in the price enables to buy more ofthe same commodity or some other. Hence,the quantity demanded increases

A I ti Li


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I2

I3

I1

E2

An Income-consumption Line

Quantity of food per week

Quantity

ofclothing

perwe

ek

E3

E1

Income-consumption line

0

Th P i ti Li


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I2

I3

I1

E2

The Price-consumption Line

Quantity of food per week

Quantityofclothing

perweek

E3

E1

Price-consumptionline

b c d

a


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Thank You

3consumer Behaviour Presentation

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