Consumer

Behaviour
We know:

1. Consumer has limited income

2. Different products/services have different per unit prices

3. From among the available products/services consumer chooses the combination of products/services that
gives the him/her the maximum level of satisfaction/ utility

We want to learn:

1. How to measure utility/satisfaction?

2. When the utility/satisfaction is maximum?

3. How does income (Budget constraint) affects utility/satisfaction?

4. How does price of product/service influence the utility/satisfaction?

5. Substitution effects?

2
 Measuring Utility/ Satisfaction

Two Approaches

&

Finding Maximum Satisfaction/Utility

3
 Studying consumer from point view of consumption of products and services
(How consumer makes choice, evaluates utility & compares price?)

Utility - Power of goods, services to satisfy wants.

Two approaches to measure this power.

Cardinal Approach Ordinal Approach

1. Utility is measurable 1. Utility is not measurable

Example: Example:
In place of 5 apples, I am satisfied with 4 I prefer apple over orange
oranges
Rank 1 Apple
5 apple’s util = 4 orange’s util
Rank 2 Orange

4
 Finding out

Maximum Satisfaction/Utility

5
 12
Consumer Behaviour - Cardinal Approach
Maximum Total Utility
10
• Consumer equilibrium is explained for one product/service by
Total Utility (TU)

8 TU and MU
6 • Relationship between TU and MU
4

2
Total Utility Marginal Utility
0 Increasing Positive
0 2 4 6 8 10 12 14 16
12 Maximum Zero
10
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑇𝑈
Decreasing Negative
8 MU =
Marginal Utility (MU)

𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑞𝑡𝑦

2
Zero MU
0
0 2 4 6 8 10 12 14 16
-2

-4 6
Quantity
 Consumer Behaviour – Ordinal Approach
14
14
12 2, 12
12
10 Indifference Budget line
Product/ Service A

Product/ Service A
10
curve
8
8
4, 7
6 6

4 6, 4 4

8, 2.5
2 10, 2 12, 1.8 2

0 0
0 2 4 6 8 10 12 14 0 2 4 6 8 10 12 14
Product/Service B Product / Service B
Indifference Curve
Shows all the possible combinations two products/services, giving same level of satisfaction/ having same utility

Budget line:
Represents the various combinations of two products/services, that can be purchased with a given money and given
price of each unit

7
 Consumer Equilibrium is achieved

When consumer consumes best possible combination

8
 Conditions for Equilibrium

Cardinal Approach Ordinal Approach

1. Every rupee spent of each commodity must yield • Budget line is tangent to indifference curve at
the same marginal utility (Law of equi-marginal equilibrium condition
utility)
12

𝑀𝑈 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑃1 𝑀𝑈 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑃2 10
Indifference curve
=
𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑃1 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑃2

Product/ Service A
8

2. Total expenditure of all goods must be equal to 6

P’1. Q1 + P’2. Q2 + ….. = Total budget 2

0
0 2 4 6 8 10 12 14
Product / Service B