1) The document discusses consumer behavior and preference analysis using the concepts of indifference curves and utility maximization. It outlines the cardinal and ordinal approaches to analyzing consumer choice. 2) Under the cardinal approach, utility is measurable and consumers aim to maximize total utility subject to budget constraints. The ordinal approach uses indifference curves to model preferences graphically without quantifying utility. 3) The key assumptions of the ordinal approach are introduced, including complete preference ordering, transitive preferences, and diminishing marginal rate of substitution. Indifference curves illustrate combinations of goods that provide equal utility.

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CONSUMER BEHAVIOUR &PREFERENCE. INDIFFERENCE CURVES (DM)
The willingness of consumers to purchase a product or service is the fundamental
source of profit for any business. A firm cannot earn a profit unless buyers
believe they can benefit by consuming the firm’s product rather than buying a
rival’s product or saving their money for future consumption. Understanding
consumer behaviour is the first step in making profitable pricing, advertising, and
product design and production decisions. The economic model of consumer
decision making is based on some fundamental assumptions, such as the
following:-
A. Consumer Behaviour Analysis.
Consumers are focused to maximize the utility which leads to the rise in demand.
If the utility derived by a consumer from a particular good is high then there
would be an increase in the demand for that good and vice versa. The basic
consumer behaviour revolved round aspects such as
1. Utility from goods and services derived vis-a-vis its price.
2. Optimum quantity of good to be consumed by him/her.
Within the limitation of his/her disposable income, how to maximize the
utility. There are two approaches to analyze the consumer behaviour:
Cardinal Approach. This is attributed to Alfred Marshall and his followers.
This is also known as neo-classicalapproach. Assumptions made for answering
the above questions under the approach are:
 Rationality. A consumer prefers to purchase good that gives him/her
highest utility and consumes last the good that gives him least utility.
 Limited Money Income. As income is limited, a consumer selects those
goods whose consumption is unavoidable.
 Maximization of satisfaction. Every rational consumer strives to
maximize his/ her satisfaction from the limited income.
 Utility is measurable. Utility is measurable as 1 unit of good is assumed
to be equal to d1 unit of money.

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 Diminishing Marginal Utility. This is the basis of consumer behaviour
analysis, the utility gained falls as more and more units are consumed of
the same good.
 Constant Marginal Utility of Money. Implies that whatever the level of
income, the MU of money remains the same. Money is used as the
measure of utility.
 Utility is Additive. Utility is not only cardinally measurable, but can be
added together to obtain the total utility.
 Consumer Equilibrium through Utility. A consumer is one who buys
goods and services for his/her personal satisfaction. Consumers’
equilibrium is achieved at a point when he/ she reaches to the
maximum level of his /her satisfaction, given resources and other
conditions. On the other hand, a consumer reaches his maximum
satisfaction level when the last unit of money spent on each good yield
the same utility. Technically the equilibrium is expressed as
MUx= Px (Mum).
Consumer surplus is the difference between the economic value of a
good (its demand price) and the market price the consumer must pay.
The area is marked by ‘smilie’.Consumer almostnever pay the maximum
amount they are willing to pay.
Supply curve
price B
Consumer surp
Demand curve
Consumer surplus is the
difference between the
economic value of a good
(its demand price) and the
market price the consumer
must pay. The area is
marked by ‘smilie’.Consumer
almost never pay the
maximum amount they are
willing to pay.

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Qd
 Producer Surplus. For each unit supplied, the difference between market
price and the minimum price producers would accept to supply the unit
that is, its supply price is the producers surplus. The difference between
the supply and demand curves (Triangle ABC in the diagram) is the
producer’s surplus.
 Social Surplus. Is the sum of consumer and producer surplus, which is the
area below demand and above supply over the range of output, produced.
It denotes the net gain to society as a whole from any specific level of
output.
 Economic Value is the maximum amount any buyer in the market is willing
to pay for the unit, which is measured by the demand price for the unit of
the goods or services.
B.Ordinal Utility Approach. It was propounded by J.R.Hicks and R.G.D.Allen.
This approach is also known as indifference curve analysis.
The assumptions made under the approach are:
 The Consumer’s Optimization Problem. It is assumed that all individuals
make consumption decisions with the goal of maximizing their total
satisfaction from consuming various goods and services, subject to the
constraint that their spending on goods equals their incomes or may be
even more than THEIR INCOMES.
 It is assumed that the consumers are completely informed about all things
that matter. Buyers are assumed to know the full range of products and
services available, as well as the capacity of each product to provide Utility.
They are also assumed to know the price of each good and their personal
income during the time period.
 Consumers are assumed to be able to rank various combinations of goods
and services according to the level of satisfaction associated with
combination. Such combination of goods and services are called

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consumption bundles meaning a particular combination of specific
quantities of goods or services that given the highest utility or satisfaction.
 A consumer is assumed to be able to complete preference ordering, that is
consumers are able of satisfaction associated with combination. Such
combination of goods and services are called consumption bundles
meaning a particular combination of specific quantities of goods or services
that given the highest utility or satisfaction.
 A consumer is assumed to be able to complete preference ordering, that is
consumers are able to rank all conceivable bundles of commodities for
every possible pairs of consumption bundle. Further, he/she exhibit
consistency of choice meaning that the preference remains constant over
the period of time
 Consumer preferenceis also assumed to be transitive. It means a consumer
is able to indicate preference like A is preferred to B and B is preferred to C.
It follows then that if A.>B and B>C. Then it follow A>C>.Transitivity helps
with certainty predict the bundle a consumer will choose to buy.
 For consumption more is preferred to less. This nonsatiation makes a
consumer to demand more and more of a commodity in reference to price.
 Economists name the benefits consumers obtain from the goods and
services they consume- Utility, which is measurable. Consumer preference
can be represented as a utility function; it shows an individual’s perception
of the level of utility that would be attained form consuming each
conceivable bundle or combination of goods and services.
 The indifference curve. It is defined as the locus of points on the graph
each representing a different combination of two substitute goods which
yield the same utility or level of satisfaction to a consumer. Therefore, a
consumer is indifferent between any two combinations of two goods when
it comes to making a choice between them. When these combinations are
plotted on the graph, the resulting curve is called indifference curve. This
curve is also called iso-utility curve or equal utility curve.
 Marginal Rate of substitution. MarginalRate if substitution (MRS) refers to
a curve at which one good is substituted for other, while keeping the level
of satisfaction of a consumer intact. In other words, MRS between two

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goods, X & Y is defined as the quantity of X which is required to replace Y or
quantity or Y required to replace X so that the total utility remains same. It
is expressed as : MRS x,y = ^Y/^X.MRS is called the slope of indifference
curve.
..
Properties of Indifferencecurve.
IC has four main properties, viz;
 IC curves cannot intersect each other.
 The budget equation states that the total expenditure Indifference
curve slopes downwards towards right.
 Ic is convex to the origin.
 Indifference cannot exceed the total income. Indifference curved
indicates higher level of satisfaction than the lower.
Concept of budget Line. A consumer suffers fromtwo constraints, namely, limited
income and prices of goods. The lack of income is called budgetary constraint and
is expressed as:
Px.Qx+ Py.Qy=MRS xy.
Consumer equilibrium is at the point where his budget line is in tangent to
Indifference curve. At this level, a consumer attains maximum satisfaction with
the goods X&Y. Thus, the first condition for the consumer to be in equilibrium is
Basic assumption of MRSis that it
diminishesimplyingthataconsumer
sacrificessome unitsof goodXor Y
substitutingXforY or Y forX. The
diminishingMRSisfor tworeasons:
1. Consumeriswillingtosacrifice
more of goodwhose quantityis
largerand as 2. Two goodsare not
perfectsubstitutesof eachother.
Figure 1

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that the IC should touch the budget line. The second condition is that the slope of
budget line should be equal to the slope of the indifference curve.
Consumer Equilibrium through Budget line.
AIC1
IC
O
 Criticism if Indifference curve..
 Prof D.H. Robertson was of the view that indifference curve approach us
juke an old wine in a new bottle and tells nothing new. He further
advocates that indifference curve approach is same as utility theory. The
only change which Hicks has made is in use of words, MRS instead of
marginal utility. The other critics are:
 Assumes thatthere are only two goods in IC approach, whereas consumers
want variety in real life.
 Fails to provide a clear explanation of consumer behaviour.
 Provides combinations that are not based on the principles of economics.
 Ignores risks and uncertainty while analyzing the consumer behaviour.
Consumerequilibriumisthe pointatwhichconsumer
attainsmaximumsatisfaction.A consumerissaidto
be in equilibriumwhenthe budgetline touches
indifferencecurve withgivenprice andincome.ABis
the budgetline.
Slope of Budgetline Px/PY.
Slope of IC ^Y/^X= MRS xy.Thus,Px/Py=MRSxy.