Consumer Behavior

Introduction
Consumer behavior is the study of how the consumers, make purchase decisions and what are the

underlying factors that influence such decisions.

Importance of Consumer Behavior

1. It is beneficial for the marketer to study the behavior of the consumers in order to make
better strategic marketing decisions. If the marketer has complete knowledge about the
consumer’s likings or disliking, then he can predict the response of the potential
customers towards his goods. Therefore, studying the consumer behavior before and
during purchase helps in production scheduling, designing, pricing, positioning,
segmentation, advertising and other promotional activities.
2. Studying of consumer behavior is equally important for the non-profit organizations such
as governmental agencies, hospitals, NGO’s, charitable organizations. For example, the
polio campaigns can be designed for the vulnerable sections of the society who cannot
afford the basic livelihood.
3. The Government also studies the consumer behavior to provide them with the necessary
goods and services, understanding the potential future problems, such as pollution, anti-
plastic drive, etc.
4. For legislation, it is again essential to understand the consumer behavior, then only the
protective measures against the consumer exploitation can be taken. Such as mandatory
information on the packaging related to manufacturing date, expiry date, terms of use,
etc.
5. The understanding of a behavior of a consumer is necessary before the launch of the
remarketing strategies. For example, motives, attitude, behavior of the customers behind
the purchase of injurious products Viz. Cigarettes, Tobacco, etc. should be properly
understood.
Factors Influencing Consumer Behavior

These are some of the underlying factors that influence the consumer behavior, and the marketer
must keep these in mind, so that appropriate strategic marketing decision is made.

Psychological: The human psychology plays a crucial role in designing the consumer’s
preferences and likes or dislikes for a particular product and services. Some of the important
psychological factors are: Motivation, Perception Learning Attitudes and Beliefs

Social Factors: The human beings live in a complex social environment wherein they are
surrounded by several people who have different buying behaviors. Since the man is a social
animal who likes to be acceptable by all tries to imitate the behaviors that are socially acceptable.
Hence, the social factors influence the buying behavior of an individual to a great extent. Some
of the social factors are: Family, Reference Groups, Roles and status

Cultural Factors: It is believed that an individual learns the set of values, perceptions,
behaviors, and preferences at a very early stage of his childhood from the people especially, the
family and the other key institutions which were around during his developmental stage. Thus,
the behavioral patterns are developed from the culture where he or she is brought up.

Personal Factors: There are several factors personal to the individuals that influence their
buying decisions. Some of them are: Age, Income, Occupation, and Lifestyle

Economic Factors: The last but not the least is the economic factors which have a significant
influence on the buying decision of an individual. These are: Personal Income, Family Income,
Income Expectations, Liquid Assets of the Consumer, Savings

In this section, we look at how consumers make economic choices, so that we can then go on to

examine how those choices interact together in economic markets. A key concept in the study of

consumer behavior is utility.

Different concepts governing consumer behavior

Utility

We have already seen that a primary focus of economics is to understand behavior given the

problem of scarcity: the problem of fulfilling the unlimited wants of humankind with limited or

scarce resources. Because of scarcity, economies need to allocate their resources in such a way

that everything ends up where it ought to. Underlying the laws of demand and supply is the

concept of utility, which represents the satisfaction, advantage, pleasure, or fulfillment a person

gains from obtaining or consuming a good or service. Therefore, Utility is the word used to

describe the pleasure, satisfaction or benefit derived by a person from the consumption of goods

OR Utility is the usefulness, benefit or satisfaction derived from the consumption of goods and

services.

Total utility

This is the total satisfaction derived from the consumption of various units of goods and services
is called total utility. Every unit of a commodity has its marginal utility (a utility derived from
the consumption of an additional unit), and the total utility is the summation of all these
individual marginal utilities. Suppose a consumer consumes four units of commodity X at a point
of time and derives utilities from the successive consumption of units as u1, u2, u3, u4, then the
total utility from the consumption of commodity X can be measured as follows:

Ux = u1+u2+u3+u4

If the consumer consumes ‘n’ number of commodities, then the utility derived from the
consumption of each commodity, let’s say, X, Y and Z are U x, Uy, Uz. The total utility is the sum
of utilities of each individual commodity and hence is measured as:

TUn = Ux + Uy +Uz
Therefore, total utility is then the total satisfaction that a person derives from spending his income

and consuming goods. But also we can say Total utility is the entire satisfaction one derives

from consuming a good or service.

 Marginal utility is the satisfaction gained from consuming one additional unit of a good

or the satisfaction forgone by consuming one unit less. Similarly Marginal utility is the

additional utility derived from the consumption of one more unit of the

good. If someone eats six apples and then eats a seventh, total utility refers to the

satisfaction he derives from all seven apples together, while marginal utility refers to the

additional satisfaction from eating the seventh apple, having already eaten six.

There are two main approaches of comparing utility derived from consuming different

commodities; these approaches are cardinalist approach and ordinalist approach.

Cardinal approach; This approach assumes that utility can be measured. Under this approach

some economists suggested that utility can be measured in monetary units, by the amount the

money the consumer is willing to sacrifice for another unit of the commodity and suggested its

units as utils

Assumptions under cardinal approach

I. Rationality, the consumer is rational, that he aims at maximizing his utility subject to his

constrained income

II. Diminishing marginal utility; the utility gained from successive units of the commodity

diminishes .in other words the marginal utility of the commodity diminishes as more of

the commodity is consumed

III. The total utility of the basket of goods depends on the quantities of individual

commodities in the basket

UT = f ( X1,X2,X3,……….Xn)

Diminishing Marginal Utility (MU)

This is the decline in marginal utility as a consumer consumes more and more units of

the commodity.

MU = change in total utility

change in quantity consumed

Table; illustration of MU
Quantity of commodity X total utility/week Marginal Utility

0 0 -

1 40 40

2 60 20

3 70 10

4 65 -5
 Consumer equilibrium (Maximum satisfaction)

An important question to ask is at what levels of consuming different goods will the consumer

achieve maximum satisfaction (equlibrium)?

Beginning with a simple model of a single commodity x. under this condition the consumer is in

equilibrium when the Marginal utility of x (MUx) is equated to the market price of x.

MUx = Px consumer equilibrium

If the MUx is greater than its price the consumer will increase his wellbeing by purchasing

more units of the commodity x, but if the MUx is less than its price then the consumer will

increase his satisfaction by cutting down the quantity of x and keeping part of his income

unspent.

In the model of more than one commodity, consumer equilibrium will be

Let MUx = Px ------------(1)

MUy = Py ------------(2)

Divide eqn (1) by (2)

MUx = MUy
Px = Py consumer equilibrium

Ordinal approach;
The ordinal approach had a view that utility cannot be measured cardinally, but an individual
consumer can rank bundles of goods in order of preference.
Assumptions
I. Rationality, consumer prefer more than less(maximize utility)
II. Utility Is ordinal; consumer can rank his preference (order of various basket of goods )
according to the satisfaction of each bundle.
III. Consistent and transitivity of choce. A>B and B>C
 Indifferent Curve; this is the curve that join together all the different combinations of
two goods which yield the same utility to the consumer.
Good y

10 a I3

4 b I2

I1 X

3 6

Along indifferent curve I1 the consumers derive the same level of utility by consuming different

combinations of commodity Y and x. Point a (3, 10) and point b(6,4) both have the same utility

level tom the consumer. Indifferent curve I1, I2 and I3 constitute what called indifferent curve

map.

Characteristics of indifferent curve

I. Indifferent curve can never intersect.

I2

B c I1
 X

the individual is indifferent between ac along curve I1 but also he should be indifferent at bc

along curve I2, but this would be irrational because a contain more units/quantities of commodity

Y than b all with the same quantity of commodity X, therefore to be consistent with rationality,

indifferent curves cannot intersect each other.

II. Indifferent curve slopes downward from left to right

When a consumer is consuming both commodity Y and X, he intends to derive the same level of

utility from any combination of the two commodities consumed. Moving along indifferent curve

I, as he consumes more of X, less of Y is consumed retaining same level of utility.

III. Indifferent curves are convex to the origin

I
 X

As more units of Y are given up, larger quantities of X are consumed to have same utility