Consumer Behaviour

Dr. Aruna Kumar Dash

IBS Hyderabad
I Prefer Bike to Scooter.
I am Going to Buy a
New Hero Honda
Passion. It is So
Reliable and Hold Its
Resale Value So Well

Consumer Behavior
 What is Consumer Behavior?
Reconciling Conflicts Between:

Preference

Choice

Utility
• Preference
The consumer Makes Preferences by expressing his or her
likes and Dislikes

• Choice
Makes the Choice from Preferred Alternatives that Suits his or
her Budget.

• Utility
By Making a Choice He or She Maximizes his or her Utility
or Satisfaction.
 Why Consumer Behavior?
• Preference
It leads Manager to Take the Decision What to to Produce i.e.
Product Decision

Choice:
Helps Manger by Telling How to Produce and Taking
Appropriate Pricing Decision

Utility:
Feedback for Managers and Helps in Taking the Product
Renovation Decision
 Utility
Utility refers to the total satisfaction received from consuming a
good or service. Economic theories based on rational choice
usually assume that consumers will strive to maximize their
utility. The utility of a good or service is important to understand,
because it directly influences the demand, and therefore price, of
that good or service. utility can decrease as the number of
products or services consumed increases. The first slice of pizza
may yield 10 utility(utils), but as more pizza is consumed, the utils
may decrease as people become full. This process will help
consumers understand how to maximize their utility by allocating
their money between multiple types of goods and services as well
as help companies understand how to structure pricing. In
practice, a consumer's utility is impossible to measure and
quantify. Various schools of thought differ as to how to model
utility
 The Concept of Utility
• Cardinal Utility
Utility is Measurable and Quantifiable.
Imaginary Unit of the Measurement is
Utils.Note: Measuring unit of utility is
known as utils

• Ordinal Utility
Cannot be Measured. It is Subjective. Only can
be Ranked or Compared
• Cardinal Utility
This approach assumes that utility derived from a particular product is
independent by itself. Hence, the utility obtained from the consumption
of one product is not dependent on the utility derived from other
product.
The Marshalian cardinal utility analysis is based on following
assumptions
1. Consumers are rational
2. Consumption must be continuous
3. Units of commodity consumed must be homogeneous i.e same quality
and quantity
4. Utility is expressed in monetary term
5. Constant marginal utility of money-it means that the utility per unit of
money remains unchanged for the customer. This implies that each
additional unit of money provides the consumer with same level of
satisfaction.
6. Diminishing marginal utility
Total Utility and Marginal Utility

• Total Utility is the total amount of satisfaction

obtained from the consumption of all the units of
goods and services during a period of time.
Total Utility of the Consumption of a Good

Ux  Ux1  Ux2  Ux3  .......

Total Utility of the Consumption of Different
Goods
U  Ux  Uy  Uz  ....
Assume that a person consuming first
cigarette he will get certain level of
satisfaction. His total utility goes up when
he consumes the second cigarate. Now if
he consumes one more, he reaches the
satisfaction quantity. Now any additional
consumption beyond this point, will not
add to the person’s utility, but will make
him sick.
 Total Utility vs. Marginal Utility
Quantity of Total Utility Marginal
cigarate (Utils) Utility
consumed (Utils)
0 0 undefined
1 5 (5-0)/(1-0)= 5
2 8 (8-5)/(2-1)= 3
3 10 (10-8)/(3-2)= 2
4 10 (10-10)/(4-3)= 1
5 9 (9-10)/(5-4)= -1
6 7 (7-9)/(6-5)= -2
The above table shows that when first two units of goods are
consumed total utility increases . When the third unit is
consumed total utility reaches its maximum at point 10.
Utility remains constant even after the consumption of the
fourth units but when the consumer starts consuming 5th and
6th units of the goods then total utility reduces.

In this figure point A and B with increasing total utility.

Total utility reaches maximum at point D . A further
increase in consumption (5th and 6th units) shows that the
total utility diminishing and total utility curve starts
declining
Theoretical relationship between
TU and MU
 At zero consumption, TU is Zero, and marginal utility is
undefined
 Marginal Utility Decreases if more units of the Same
Commodity is Consumed,but total utility increases
 Total Utility is Increasing but at a Decreasing Rate
 Marginal Utility Becomes 0 at a Particular Point Where
the Total Utility will Be Maximum
 Once Marginal Utility Becomes Negative, Total Utility
Starts Falling
 Diminishing Marginal Utility
• It Tells that MU of any Good Tends to
Decline as a more of the Good is
Consumed Over a Definite Period of
time.
• The Consumer will Stop Consuming the
Good Much Before Reaching MU=0.

https://www.youtube.com/watch?v=4nC9ioN
qizY
Ways to Attain Consumers Equilibrium
through cardinal approach
Principle of Equimarginal Utility
• The Principle
Consumer will distribute his money Income
between goods in Such a way that utility derived
from the last rupee sent on each good is same

Or
The Consumer’s Equilibrium is the Position where
Marginal Utility of Money Expenditure on each
good is the same
Essentials:
• Diminishing Marginal Utility for Each Good

• Assumption of Constant Utility of Money

• Income is Fixed

• Prices of each Good are Given

 Example:
• The Consumer’s Fixed Income Rs 13 to be
Allocated Between two Goods X and Y

• The Prices of two Goods X and Y are

Given as Rs 2 and Rs 5 Respectively

• The Marginal Utility of Money is Constant

at Rs 1 = 5 utils
 Marginal Utility of Goods X and Y
Units MUx MUy MUx/Px MUy/Py
consumed (Utils) (Utils) Px=2 Py=5

1 20 35 10 7
2 18 30 9 6
3 16 25 8 5
4 14 20 7 4
5 12 15 6 3
 MUx MUy
(i )  Worthwhile to spend on X
Px Py
MUx MUy
(ii )  Worthwhile to spend on Y
Px Py
 Consumer Surplus
Consumer Surplus is the difference between what the
consumer is willing and able to pay and what he/she
actually paid. Consumer surplus will be more if person is
ready to pay more as compared to market price(market
clearing price). It's a measure of the additional benefit
that consumers receive because they're paying less for
something than what they were willing to pay. Consumer
surplus is derived from the demand curve. Consumer
surplus is the area above the market clearing price and
below the demand curve. For example, let's say that you
bought an airline ticket for a flight to Disney during school
vacation week for $100, but you were expecting and
willing to pay $300 for one ticket. The $200 represents
your consumer surplus.
Price
$300 Supply

CS
$100

Demand

0
Quantity
Thank You