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Consumer preferenceand choice

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What is consumer

preference?Prioritization of wants on the basis of

Urgency.

Intensity of such wants.

Paying capacity.

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Why study?Helps in identifying marketing variables:

Product offering.

Pricing strategy.

Promotion.

Transportation and communicationetc

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Two schools of thoughtCardinal Utility Analysis.

Ordinal Utility Analysis.

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Understanding consumer

choiceDepends upon

Demographic factors.

Psychographic factors.

Geographical factors.

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Three basic assumptionsPreferences are complete.

Preferences are transitive.

Consumers always prefer more of any good toless.

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UtilitySatisfaction a consumer derives out of

consumption of commodity.

A rational consumer aims at maximizinghis/her utility from consumption of differentcommodities, subject to budget constraint.

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Cardinal UtilityUtils the unit of utility.

Commodities can be assigned with no. of utils.

Utility is additive in nature.

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Total utility and marginal

utilitySum total of utility levels out of each unit of a

commodity consumed within a given period oftime.

Marginal utility is the total utility of theadditional unit consumed of the commodity.

MU = TUn TUn-1

MU= TU/ Q.

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Law of diminishing

marginal utilityMarginal utility for successive units consumed

goes on decreasing.

Assumptions:The unit of consumption is standard.

Consumption must be continous.

Multiple units of the commodities should beconsumed.

The taste and preference of the consumershould remain unchanged during the course of

consumption.

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Law of equimarginal

utilityHow a consumer would spend his income on

different commodities?

Equi-marginal principleMUa \ Pa = MUb \ Pb = MUc \ Pc = MUn \ Pn

If price of a good changes - reallocate income

If income is fixed

utility is maximised when the utility from theLAST rupee spent on ALL goods is equal

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Law of Equi-marginal

UtilityRs.25/-/unitUtility derived

from Rs.25/-spent on

Oranges

Caps Milk

1st 10 13 11

2nd 8 12 9

3rd 7 10 6

4th 5 8 5

5th 4 6 4

6th 3 4 2

Total Income to be spent =Rs.400/-

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Indifference CurvesLocus of all points which show the different

combination of two commodities a consumerachieves the same satisfaction or utility.

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Properties of Indifference

curvesLies in the positive quadrant.

IC s are downward sloping

Shape of curve is always convex to the origin.

IC s never intersect each other.

Higher IC means higher utility.

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Marginal Rate of

SubstitutionProportion of one good that the consumer will

be willing to give up for more of another.

Combination

A B MRS

C1 1 6 -

C2 3 3 1.5

C3 4 2 1

C4 7 1 0.3

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Types of IC s

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