consumer behavior final 2010

8/7/2019 Consumer Behavior Final 2010

http://slidepdf.com/reader/full/consumer-behavior-final-2010 1/12

Consumer Behavior

Consumer Behavior



Slide 2

Topics to be Discussed

Consumer Preferences

How and why people prefer one good to another

Budget Constraints

People have limited incomes.

Consumer Choice

What combination of goods will consumers buy to

maximize their satisfaction?



Cardinal Utility Approach

Slide 3



CONSUMER BEHAVIOR

Fundamental postulate of consumer behavior isthat consumer’s utility maximizing behavior

Can utility be measured? – matter of dispute

Marshall & his followers- utility is cardinallymeasurable

Modern economists rejected that – utility canonly be measured ordinally



CONSUMER BEHAVIOR

Three major approaches to analysis of consumer behavior:

Cardinal Utility Approach adopted by Neoclassical economists

Ordinal Utility Approach also known asIndifference Curve Analysis

Revealed Preference Approach of MiltonFriedman



Meaning of UtilityUtility

Power of a commodity to satisfy human wantsUtility is not absolute, it is relative to a person’s needsUtility derived depends on a person’s intensity of desire for

that commodity

Utility of some commodities depends on availability of complementary goodsUtility is ethically neutral- neutral between good & bad

AssumptionPeople allocate their income to maximize their satisfaction

or total utility



Measurability of Utility

Utility a psychological phenomenon

Can utility be measurable in absolute

terms? Classical & neo classical economists

believed that utility is quantitatively &

cardinally measurable



CONSUMER BEHAVIOR Their method of measuring utility:

Walras- used the term ‘util’ meaning ‘units of utility’

Classical economists used ‘util’ as measure of utility

Price a consumer is willing to pay equals the utility derived

Marginal utility of money remains constant

This method rejected by modern economists

Cardinal Utility Function: utility function describing the extent

to which one market basket is preferred to another.



Total and Marginal utility

Total utility (TU) with reference to a single commodity may be defined asthe sum of the utility derived from all units consumed of the commodity

If consumer consumes 4 units of a commodity & derives U1, U2, U3, U4utils from them then

TU = U1 + U2 + U3 + U4

If he consumes n units then TUn = U1 + U2 + U3 + U4------ + Un

If number of commodities consumed & their units are greater than onethen

TU = TUx +TUy + TUz + ------ + TUn

Where x,y,z & n denote commodities



Marginal Utility Marginal utility measures the additional satisfaction obtained from

consuming one additional unit of a good

MU is the utility derived from the marginal or last unit consumed

MU is the addition to the TU i.e. utility derived from consumption of oneadditional unit

or MU is the change in TU resulting from the change in consumption

MU = ∆ TU /∆ Q

MU may also be expressed as

MU = TUn – TU n-1

Slide 10


http://slidepdf.com/reader/full/consumer-behavior-final-2010 12/12Slide 12

The principle of diminishing marginal utility states that as

more and more of a good is consumed, the utilityderived by the consumer from the successive units goeson decreasing provided the consumption of all other goods remains constant

The additional benefit which a person derives from a

given increase of his stock of a thing diminishes withevery increase in the stock that he already has

Diminishing Marginal UtilityDiminishing Marginal Utility

consumer behavior final 2010

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