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Consumer Behaviour CHP 3

The document discusses the theory of consumer behavior, focusing on concepts such as utility, total utility, and marginal utility, along with the relationship between them. It explains consumer equilibrium through cardinal utility and indifference curve analysis, emphasizing the conditions under which consumers maximize their satisfaction given their budget constraints. Key principles include the law of diminishing marginal utility and the properties of indifference curves, which illustrate consumer preferences and substitution rates between different goods.

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11 views10 pages

Consumer Behaviour CHP 3

The document discusses the theory of consumer behavior, focusing on concepts such as utility, total utility, and marginal utility, along with the relationship between them. It explains consumer equilibrium through cardinal utility and indifference curve analysis, emphasizing the conditions under which consumers maximize their satisfaction given their budget constraints. Key principles include the law of diminishing marginal utility and the properties of indifference curves, which illustrate consumer preferences and substitution rates between different goods.

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suneelgupta930
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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H THEORY OF CONSUMER BEHAVIOUR; MARGINIAL UTILITY AND INDIFFERENCE CURVE ANALYSIS ying power of a commodity: satisf tisfaction derived by the UTILITY: refers to the want TOTAL UTILITY: refers to the total consumer from the consumption of a specific quantity of a commodity. TU, = MUs +MU2 MUnth y derived from MARGINAL UTILITY: refers to the additional utilit the consumption of an additional unit of a commodity. MU pth= TUn-TUn-a RELLATIONSHIP BETWEEN TOTAL UTILITY AND MARGINAL UTILLITY: 1) When total utility is increasing at a decreasing rate then marginal utility | decreasing but is positive. 2) When total utility is at the maximum then marginal utility is zero. 3) When total utility is decreasing then marginal utility is negative. sumed of a co mMmodity increas, 5 other things being equal t: 3 Equal the utility deriy Tived by the Consun Mer fror mM the © additional units i.e. ma arginal utility g Boes on Assumption: 1) The c onsum ; €r is rational while taking consumption decision. Margi Binal utility of money is assumed to be constant. 3) The utility is measureable. 4, ) All the units of a commodity must be identical in size, colour, design etc. 5) The must be continuity in consumption. EXPLANATION OF LAW: ¢ As more and more quantity of a commodity is consumed the intensity of desire decreases and therefore the utility derived from the additional unit decreases. ¢ If we are hungry and we ate mangoes we would get a larger utility from the first mango because intensity of our hunger is very high. © When we ate the second atisfaction be s ze hunger goes on decreasing, " © The utility we derive from the successive Units goes 0 decreasing CONSUMERS EQUILIBRIUM THROUGH CARDINAL UTILITY APPROACH: ONE CASE COMMODITY: A utility maximizing consumer will be in equilibrium when he/she purchases that much quantity of the commodity where the marginal utility of the commodity equals its price. Units of | Marginal utility (rs)|*,_.covegenss.cou'esintcor + SORE ER comer mu, = Pe 700. ‘| =| 650 | 600 500 ase © Quantity of commodity * ASSUMPTION: 1) The consumer is rational 2) Consumer's income remains constant. 3) The law of diminishing marginal utility applica 4) Utility can be measured in money terms. ble. MU,=P, MU,>P,= if EXPLANATION OF LAW: = IT Margin: consume Binal utility of X is greater than the price of X the T Can incre; is a unit of x. se his/her total utility by purchasing more Mu, ee Curve analysis is based on the assumpt e 1 assumption of diminishing rr r s tio Narginal rate of substitu S| EXPLANATION OF LAW: AB is the budget line or price line. IC:, IC, IC;, are indifference curves. A consumer can buy any of the combination R, H, S, of good X and good Y show on budget line. At point IC,(R,S)-The consumer can’t attain equilibrium because it is below the budget line. At point IC2(H)- The consumer attain equilibrium at \C,(H) which is parallel to budget line because at this point budget line is tangent to the highest indifference curve \C2 At point IC3(C,D)- The consumer can’t attain equilibrium which is above the budget line. He can only buy those which ine AB but also coincide with the are not only on budget | urve which is \Co.— highest with the highest indifference c'

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