Consumer behavior is the study of individuals, groups, or organizations and all the activities associated with the purchase, use and disposal of goods and services. Consumer behaviour consists of how the consumer's emotions, attitudes, and preferences affect buying behaviour.

1. CONSUMER BEHAVIOR
Dr. B. G. Lobo
Vice Principal,
Faculty of Arts and Commerce,
Prof. Ramkrishna More College, Akurdi,
Pune-44

2. Consumer Behavior
Utility is defined as the want satisfying power of a commodity.
Hibdon, “Utility is thequality of a good to satisfy a wan”t
Utility

3. TYPES
OF
UTILITY
Form
Utility
Place
Utility
Time
Utility
Service
Utility

4. UTILITY APPROACHES
Cardinal
Approach
Law of
Diminishin
g Marginal
Utility
Law of
Equi
Marginal
Utility
Consumer
Surplus
Ordinal Approach
Indifferenc
e Curve
Analysis
Revealed
Preference
Theory

5. CARDINAL APPROACH
#
•Utility can be measured in cardinal numbers and
assigned a cardinal number like 1, 2, 3 etc.
#
•Marshall used a psychological unit of measurement
of utility called utils.
#
•The marginal utility of money remains constant
throughout when the individual is spending money
on a good.
#
•Marginal Utility of every commodity is independent.

6. Law of Diminishing Marginal Utility
“The additional benefit which a person derives from a
given increase in the stock of a thing diminishes with
every increase in the stock that he already has.”
The greater the amount of a good a consumer has, the
less an additional unit is worth to him or her.
It is the marginal utility and not the total utility which
declines with the increase in the consumption of a good.

7. Assumptions
1. Utility can be measured in cardinal number system such
as 1,2,3 etc.
2. There is no change in income of the consumer.
3. Marginal utility of money remains constant.
4. Suitable quantity of the commodity is consumed.
5. There is continuous consumption of the commodity.
6. Marginal Utility of every commodity is independent.
7. Every unit of the commodity being used is of same
quality and size.
8. There is no change in the tastes, character, fashion, and
habits of the consumer.
9. There is no change in the price of the commodity and its
substitutes

9. Conclusions about Relationship between TU and
MU
1) Total utility rises as long as MU is positive, but at a diminishing rate because MU is
diminishing.
2) Marginal utility diminishes throughout.
3) When marginal utility is zero, total utility is maximum. It is a saturation point.
4) When marginal utility is negative, total utility is diminishing
5) MU is the rate of change of TU or the slope of TU.
6) MU can be positive ,zero or negative

10. Exceptions to this Law
Hobbies
Misers
Rare collection
Abnormal person
Habitual goods
Durable and valuable goods

11. LAW OF EQUI-MARGINAL UTILITY
 The law of equi-marginal utility is simply an
extension of law of diminishing marginal utility to
two or more than two commodities. It is named as the
Law of Substitution and the Gossen’s Second Law.
In cardinal utility analysis, this law is stated by
Lipsey in the following words:
“The household maximizing the utility will so allocate
the expenditure between commodities that the utility of
the last penny spent on each item is equal”.

12. ASSUMPTIONS
 Cardinal measurement of utility is possible.
 Consumer is relation , that is, he wants maximum
satisfaction from his income.
 Income of the consumer remains constant. Income
of the consumer is fixed and constant.
 Marginal Utility of money remains constant.
 Prices of the commodities remain constant.
 Commodity is divisible into small units. Its means
that the consumer can spend his income in small
units of money , say , one rupee.
 Consumption takes places at a given time period.

15. IMPORTANCE OF THE LAW
Consumption
Production
Exchange
Distribution
Public Finance
Distribution of Income between Saving
and Consumption
Optimum Distribution of Commodities
Distribution of Assets

16. CRITICISM OF THE LAW
 Consumer are not fully rational
 Consumer is not Calculating
 Shortage of Goods
 Influence of Fashion, Customs and Habits
 Ignorance of the Consumer
 Indivisibility of Goods
 Constant Income and Price
 Cardinal Measurement of Utility of Money
 Complementary Goods

17. COMSMER’S SURPLUS
 Consumer’s equilibrium refers to a situation wherein a consumer gets maximum
satisfaction out of his limited income and he has no tendency to make any change in
his existing expenditure.
P= S

18. ASSUMPTIONS
Consumer is assumed to be rational.
Marginal utility of Money is Constant.
Fixed price and Income.
Tastes are constant.
Perfect knowledge
Independent utility
Cardinal Utility

19. Single commodity with one use
 When a consumer buys a commodity, he pays a price for it.
For each unit of the commodity he makes a sacrifice in
terms of price. In returns he gets some utility from each
unit. By the law of diminishing marginal utility, the utility
of each successive unit goes on diminishing as more and
more units of a commodity are consumed.
A rational consumer will consume the commodity upto a point
where the MU of the final unit of the commodity is equal to the
MU of money (in terms of price) paid for it. The consumer will
get maximum satisfaction and will be in equilibrium. (where MU
=price)

20. Consumer’s Surplus in case of one
commodity with one use
Unit of ‘X’
(1)
M.U. of ‘X’
(2)
Utility of ‘X’
sacrificed in
terms of Price
of ‘X’ (3)
Surplus ( 2-3)
1 50 20 30
2 40 20 20
3 30 20 10
4 20 20 0
5 10 20 -10

22. Criticism of Cardinal Utility Analysis
 Utility is Subjective.
 Cardinal measurement of utility is not possible.
 Every commodity is not an independent commodity.
 Marginal utility cannot be estimated in all
conditions.
 Marginal utility of money does not remain constant .
 No division of Price effect between Income Effect
and Substitution Effect.
 Utility analysis breaks down in an under- developed
Planned Economy.
 Consumer is regarded as a computer.

23. ORDINAL
APPROACH
Indifference
Curve Analysis
Revealed
Preference
Theory

24. INDIFFERENCE CURVEANALYSIS
Indifference Curve approach was first propounded by British economist Edgeworth in 1881
in hisbook “MathematicalPhysics.”
The concept was further developed in 1906 by Italian economist Pareto, in 1913
byBritisheconomistW.E.Johnson,andin1915byRussianeconomistStutsky.
The credit of rendering this analysis as an important tool of theory of Demand goes
to Hicks and Allen. In 1934, they presented it in a scientific form in their article
titled“AReconsideration ofthe Theoryof Value.”Itwas discussedindetail by Hicks
inhis book, “Value and Capital”.

25. INDIFFERENCE CURVE CONCEPT
An indifference curve is a curve which represents all
those combinations of two goods which give same
satisfaction to the consumer.
An indifference curve is a locus of all such points which
shows different combinations of two commodities which
yield equal satisfaction to the consumer.
According to Ferguson, “An indifference curve is a
combination of goods, each of which yield the same
level of total utility to which the consumer is
indifferent.”

26. INDIFFERENCE SCHEDULE
An indifference schedule refers to a schedule that
indicates different combinations of two commodities
which yield equal satisfaction.
A consumer, therefore, gives equal importance to each of
the combinations: Supposing a consumer two goods,
namely food and clothing. The following indifference
schedule indicates different combinations that yield him
equal satisfaction.

27. INDIFFERENCE CURVE
An indifference curve IC is drawn by plotting the various
combinations given in the indifference schedule which
gives equal level of satisfaction.
The quantity of food is measured on the X axis and the
quantity of clothing on the Y axis.
It Means
A=B=C=D
In terms of satisfaction

28. INDIFFERENCE MAP
 An Indifference map represents a collection of
many indifference curves where each curve
represents a certain level of satisfaction. In short,
a set of indifference curves is called an
indifference map.
IC1 ˂ IC2 ˂
IC3

29. Marginal Rate of Substitution
Marginal Rate of Substitution
(MRS) is the rate at which a
consumer is prepared to
exchange goods X and Y.

30. Properties of Indifference Curves
1. Indifference curves slope downward to the
right:
This property implies that the two commodities can be
substituted for each other and when the amount of one good in
the combination is increased, the amount of the other good is
reduced. This is essential if the level of satisfaction is to remain
the same on an indifference curve.
It means getting 1 extra
of X consumer reduce 6
of Y for shifting A to B

31. 2. Indifference curves are always convex to the
origin :
It has been observed that as more and more of one
commodity (X) is substituted for another (Y), the
consumer is willing to part with less and less of the
commodity being substituted (i.e. Y). This is called
diminishing marginal rate of substitution.

32. 3. Indifference curves can never intersect each
other: No two indifference curves will intersect each
other although it is not necessary that they are
parallel to each other. In case of intersection the
relationship becomes logically absurd because it would
show that higher and lower levels are equal, which is
not possible.
In the diagram
A=C as on IC2
A=B as on IC1
But
C==B

33. 4. A higher indifference curve represents a
higher level of satisfaction:
This is because combinations lying on a higher
indifference curve contain more of either one
or both goods and more goods are preferred to
less of them.

34. 5. Indifference curve will not touch either axes: Another
characteristic feature of indifference curve
is that it will not touch the X axis or Y axis.
If it is so then consumption of one
commodity become Zero.

35. Consumer’s Equilibrium
 Consumer’s equilibrium refers to a situation in which a
consumer with given income and given prices purchases
such a combination of goods and services as gives him
maximum satisfaction and he is not willing to make any
change in it.
Budget = Maximum Satisfaction

36. Assumptions:
1. Consumer is rational and so maximises his satisfaction from the purchase of
two goods.
2. Consumer’s income is constant.
3. Prices of the goods are constant.
4. Consumer knows the price of all things.
5. Consumer can spend his income in small quantities.
6. Goods are divisible.
7. There is perfect competition in the market.
8. Consumer is fully aware of the indifference map.

37. The consumer is in equilibrium position when the price line
is tangent to the indifference curve or when the marginal
rate of substitution of goods X and Y is equal to the ratio
between the prices of the two goods.
Y
X
O
IC4
IC3
IC2
IC1
C
A
B
P
P
GOOD
Y
GOOD X
Y
X
Consumer’s equilibrium