Chapter : 5

1. Chapter : 5 • THEORY OF CONSUMER BEHAVIOUR

2. Two approaches to consumer behavior. • Marginal utility approach and • Indifference curve approach

3. Marginal utility approach • Meaning and concept of utility, marginal and total utilities. • Law of diminishing marginal utility. • Assumptions of LDMU.

4. Indifference curve approach. • Meaning and concept of indifference curve. • Schedule and graph for IC. • Budget or price line of consumer. • Schedule and graph for budget line. • Consumer surplus.

5. Marginal utility approach • Jevon was the first economist who introduced the concept of utility in economics in 1835. According to him utility is the power of a commodity or service to satisfy human want. Utility thus is the satisfaction which is derived by consumers by consuming goods and services.

6. Total and marginal utilities. • Total utility.TU is the total satisfaction obtained from all units of particular commodity consumed over period of time. For example, a person consumes 3 apples the utility derived from the first apple is 20, second apple 15 and third apple is 10. In this way total utility by consuming all the three units of apple is 45. thus total utility shows total satisfaction of consumer by consuming a particular commodity.

7. Marginal utility. • Marginal utility.MU means an additional or incremental utility. Marginal utility is the change in total utility that results from in one unit change in consumption of a commodity. For example, the utility derived from the second unit of apple is 15 this 15 is said to be MU after 20 and when third unit of apple is consumed the utility derived is 10 now this 10 is said to be MU after 15. thus MU shows the utility which is obtained from one additional unit of that particular commodity. Total utility is the summation of marginal utilities.

8. Law of diminishing marginal utility. • The Law of diminishing marginal utility describes a familiar and fundamental tendency of human behavior. The LDMU states that “ as a consumer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing”. Mr. H Gossen, a German economist, was the first to explain this Law in 1854. Alfred Marshall later on restated this Law in the following words: “ the additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stock that he already has”.

9. Schedule and graph to the LDMU.

10. Assumptions of LDMU. • The law of diminishing marginal utility is true under certain assumptions. These assumptions are given as under. • Consumption to be continuous. • Suitable quantity of a commodity. • Character of the consumer does not change. • No change in product nature.

11. Graphical presentation to LDMU • Graph Y c 30 26 22 18 14 10 06 04 Here in the graph X-axes shows the units of a good whereas the MU and TU is taken on Y-axes. As much as consumer consumes more n more units of a good the MU decreases while TU is increasing which are shown MU and TU curve. In the given graph ac represents TU curve while MU curve is shown by ab. TU a 0 1 2 3 4 5 6 7 X b -2 MU

12. Indifference curve approach. • The indifference curve approach was first introduced by a Russian economist, Slustsky, in 1915, he was of the view that consumers prefer to buy a bundle of goods according to their needs and wants. For this he presented indifference curve analysis. IC indicates various combinations of two goods which yield equal level of satisfaction to the consumer and consumer is indifferent as to which combination he get to maintain same level of satisfaction. Thus indifference curve shows same level of satisfaction derived from different combinations of two goods.

13. Schedule to IC.

14. Graphical presentation to IC. • Graph Y 16 12 8 4 a The given graph shows various combinations of two goods rice and wheat which yields equal or same level of satisfaction to the consumer. When all these combinations are combined, we will get a curve and that curve is known as IC. b c d e Rice IC 0 2 4 6 8 10 12 14 16 X Wheat

15. Budget or price line. • A budget or price line is very important concept of consumer behavior which represents various combinations of two goods which can be purchased with a given money income and assumed prices of goods. For example a consumer has a weekly income of 60 Afs. He want to purchased only two goods, packets of biscuits and packets of coffee. The price of each packet of biscuit is 6 Afs and the price of each packet of coffee is 12 Afs. Given the assumed income and prices of goods, the consumer can purchase various combinations of these two goods.

16. Schedule to budget line.

17. Graphical presentation to budget line. • Graph Y Here in the given graph packets of coffee is measured with X-axis and packets of biscuits is given on Y-axis, A,B,C,D,E and F are various combination of biscuits and coffee which can be purchased with the given money income of the consumer and assumed prices of the two goods . When these combinations are joined together it makes a line and that line is known as budget or price line. Budget line A 10 8 6 4 2 B C Packets of biscuits D E F 0 1 2 3 4 5 X Packets of coffee

18. Consumer surplus. • Another very important concept of consumer behavior is consumer surplus which is introduced by Alfred Marshal. According to him a consumer is generally willing to pay more for a given quantity of a good than what he actually pays at the price prevailing in the market or“consumer surplus is the difference between the maximum amount a consumer is willing to pay for the good and the price he actually pays for the good. For example, you go to the market for the purchase of a pen, you are mentally prepared to pay 25 Afs for the pen which the seller has shown to you. He offers the pen for 10 Afs only, then you immediately purchase the pen and feel happiness. In this example (25 Afs – 10 Afs = 15) 15 shows consumer surplus or extra inner satisfaction of consumer.