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Consumer Behaviour and Utility Analysis

The document discusses concepts related to consumer behavior and utility analysis, including: 1) Definitions of utility, cardinal utility, ordinal utility, indifference curves, and indifference maps. 2) Properties of indifference curves including negative slope, convexity, and that higher curves represent greater satisfaction. 3) Factors that influence consumer behavior like budget lines, consumer equilibrium, and consumer surplus. 4) The law of diminishing marginal utility and its limitations.

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189 views4 pages

Consumer Behaviour and Utility Analysis

The document discusses concepts related to consumer behavior and utility analysis, including: 1) Definitions of utility, cardinal utility, ordinal utility, indifference curves, and indifference maps. 2) Properties of indifference curves including negative slope, convexity, and that higher curves represent greater satisfaction. 3) Factors that influence consumer behavior like budget lines, consumer equilibrium, and consumer surplus. 4) The law of diminishing marginal utility and its limitations.

Uploaded by

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

Name:- Nischith. Bashettiyavar


Class:- .B.B.A.LL.B (Hons)
Subject:- Economics
Date:- 07/09/2021
Topic:- Consumer Behaviour & Utility Analysis.

UTILITY:-

It is the power of commodity to satisfy the wants/ want satisfying power of a


commodity.

CHARACTERISTICS:-

> It refers to excepted satisfaction.


> It shouldn't be confused with usefulness.
> Subjective concept.
> No ethical or moral significance.
> It is physcological.

CARDINAL UTILTY:-

This utility is measurable & can be expressed quantitatively / cardinally.


EXAMPLE:- 1,2,3,4.

ORDINAL UTILITY:-

Ranking of preferences for commodities, it is qualitative.

INDIFFERENCE CURVE:-

It is a curve that represents all the combination of goods that give the same
satisfaction to the consumer.

ASSUMPTIONS:-

> Completeness.
> Non- satisfaction.
> Consistency/ Transitivity.
> Continunity/ Subtituability.
> Convexity.

INDIFFERENCE MAP:-

The collection of indifference curves is known as Indifference map.

PROPERTIES OF INDIFFERENCE CURVE:-

1}. THEY SLOPE NEGATIVELY/SLOPE DOWNWARDS FROM LEFT TO THE RIGHT:-

As such the indifference curve must slope downward to the right.


Thus it is proved that an indifference curve cannot slope upward to the
right, nor can it be horizontal/ vertical.

2}. THEY ARE CONVEX TO THE ORIGIN OF AXES:-


They are generally convex to the origin of the axes.
This property is dervied from the law of diminishing marginal rate of
substitution.

3}. EVERY INDIFFERENCE CURVE TO THE RIGHT REPRESENTS HIGHER LEVEL OF


SATISFACTION THAN THAT OF THE PROCEEDING ONE.

4}. INDIFFERENCE CURVES CAN NEITHER TOUCH NOR INTERSECT EACH OTHER, SO THAT
ONE INDIFFERENCE CURVE PASSES THROUGH ONLY ONE POINT ON AN INDIFFERENCE
MAP.

5}. INDIFFERENCE CURVES ARE NOT NECESSARILY PARALLEL TO EACH OTHER. ALTHOUGH,
THEY ARE FAILING & NEATIVELY INCLINED TO THE RIGHT.

6}. INDIFFERENCE CURVE WILL NOT TOUCH EITHER X-AXIS/ Y-AXIS.

7}. INDIFFERENCE CURVE CAN NOT BE POSITIVELY SLOPED.

CONSUMER BEHAVIOUR:-

1}. BUDGET LINE:-


It is a graphical representation of all possible combinations of two
goods, where the consumer can buy with the available money income.

FEATURES:-

> NEGATIVE SLOPE:-


If the line is downward, it shows a reverse correlation
between the two products.

> STRAIGHT LINE:-


It indicates a continuous market rate of exchange in
individual combinations.

>REAL INCOME LINE:-


It denotes the income & the spending size of customers.

> TANGENT TO INDIFFERENCE CURVE:-


It is the point when the indifference curve meets the budget
line. This point is known as the consumer's equilibrium.

ASSUMPTIONS:-

>Two commodities.
> Income of the customers.
> Market price.
> Expense is similar to income.

EQUATION OF BUDGET LINE:-

Px* Qx + Py* Qy.

ASSUMPTIONS OF CONSUMER EQUILIBRIUM:-

> Consumer's scale of preferences across different combinations of


two goods X & Y.
> Fixed money income.
> Price of goods.
> Homogenous divisible.
> Rationality.

EQUATION:-

MRS xy= MUx/MUy = Px/Py.

CONSUMER SURPLUS:-

According to Marshall,"excess of the price which a consumer would be


willing to pay rather than go without a thing over that which he actually
does pay, is the economic measure of this surplus satisfaction."

Consumer Surplus = What a consumer is willing to pay minus what he actually


pays.

Consumer's Surplus = Total utility - [Marginal utility] * [Multiply * No. of


units purchased].

Potential Price - Actual price = Consumer's Surplus.

ASSUMPTIONS:-

> Marginal utility of money is constant.


> No close substitutes available.
> Utility can be measured.
> Tastes & Incomes are same.

FORMULA:-

Tu = U1+U2+U3+U4 ... . .. .. +Un


MU= Additional utility.

TOTAL UTILITY:-

Overall satisfaction derived by a consumer from consumption of various units


of a good / service, at a certain point/ over a period, is known as total
utility. It is also known as "Full satiety".

TUn= Ux+Uy+Uz [OR] TU= Sigma MU.

MARGINAL UTILITY:-

The term 'Marginal' refers to small change, & utility means satisfaction.

Marginal utility is also known as Marginal saticity.

MU = TUn - TUn-1

LAW OF DIMINISHING MARGINAL UTILITY:-

The additional benefit which a person dervies from a given increase of his
stock of a thing diminishes with every increase in the stock that he already
has.

STATEMENT OF THE LAW:-

This law is based on the daily experience that when a person gets more of a
commodity, the desire to have still more diminshes.
LIMITATIONS:-

> Homogenous units.


> Continuous consumption.
> No change in taste & habits of the consumer.
> Standards units of commodity.

EXPECTATIONS FOR THE LAW OF DIMINISHING MARGINAL UTILITY:-

There are certain things on which the law of diminshing marginal utility does
not apply.

Desire for money, Desire of knowledge, Use of liqour/ wine & Collection of
rare objects.

i}. UNREALISTIC ASSUMPTIONS:-

Includes homogenity, continunity & constancy conditions. All these


assumptions are impossible to find at one.

ii}. INAPPLICABILITY TO CERTAIN GOODS:-

Implies that the law of diminshing marginal utility cannot be


applied to goods, such as television & refrigator. This is because the
consumption of these goods in not continuous in nature.

iii}. CONSTANT MARGINAL UTILITY OF MONEY:-

Assumes that Marginal utility of money remains constant, which is


unrealistic. There is also a gradual decrease in the Marginal utility
of money.

iv}. CHANGE IN OTHER PEOPLE'S STOCK:-

Implies that the utility of consumers is also dependent on what other


people have in their stock. Thus, this depends on the social needs.

v}. OTHER POSSESSIONS:

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