 Chapter 2 :theory of consumer behavior

 Contents :
 1)UTILITY
 2)THE CONSUMER’S BUDGET.
 3)BUDGET SET
 4)BUDGET LINE
 5)CHANGES IN BUDGET LINE.
 Itis the want satisfying power of a
commodity , it varies with person to person .
Utility and usefulness both are not the same
some products may provide utility to some
while for others the products might be
harmful.eg tobacco, alcohol etc.
 There are two approaches to measure utility
.
 1.Cardinal approach :this theory was goiven
by Prof. Alfred Marshall ,according to which
utility can be measured in numeric values ,in
“utils”.
 2)Ordinal
Approach :According to this
approach Utility cannot be measured in
numbers .This theory was given by Prof. Allen
and Hicks, According to this theory a
consumer can rank his preference from a set
of most preferred to least preferred bundles.
 1.Total utility :it is the sum of aggregate levels of satisfaction
that a consumer experiences .Mathematically it is the sum of
Individual's marginal utility .
 TU= MU1+MU2+MU3+……+MUn.

 2)Marginal utility :The satisfaction derived from the consumption

of additional unit of a commodity is called as marginal utility .
 Marginal utility = change in total utility /change in Quantity .

 3)Average Utility :The utility derived from per unit consumption

is referred as its average utility .
 AU=TU/Q (formula)

 TU=total utility ,Q=quantity.

 This law was propounded by HH Gossen ,a
German economist .
 This law states that the satisfaction derived
from the consumption of an additional unit is
always less than its preceding unit .
 The total utility first increases at a
diminishing rate ,reaches its maximum point
and then eventually falls.
 NOTE: also go through the assumptions of
this law.
 Indifference curve is a curve on a graph
linking those combination of quantities which
the consumer regards as of equal value . All
points on indifference curve give the same
level of satisfaction to the consumer .
 Indifference map is the collection of
indifference curve .
 They are negatively sloped /downwards
sloped.
 Indifference curves are convex to their point
of origin .
 Indifference curves never touch or intersect
each other .
 Indifference curve touches neither X- axis
nor Y –axis.
A consumer budget is the real purchasing
power with which he can purchase quantities
of two goods, given their prices.
Consumers budget refers to the total amount
of money that the consumer can afford to
spend on consumption of different goods and
services given his/her limited income.
 It is the set of all possible combinations of two
goods which a consumer can afford with his
given income and prevailing prices in the market
.
 It depends upon two factors
 1) Income of the consumer.
 2)Prices of two commodities.

 Px . Qx + Py . Qy =M
 Where,
Px and Py are the prices of commodity X and Y
and Qx, and Qy is their respective quantities.
M= consumer’s money income
 The Budget Line, also called
 Definition:
as Budget Constraint shows all the
combinations of two commodities that a
consumer can afford at given market
prices and within the particular income
level.
 Changes with price of products.
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