The document discusses the theory of consumer behavior and demand. It explains that consumers attempt to maximize their utility by allocating their limited income among goods. Utility can be measured cardinally using utils or ordinally using indifference curves. Consumer equilibrium occurs when marginal utility per rupee is equal for all goods, or when the indifference curve is tangent to the budget line. A change in prices or income can shift the budget line, impacting the consumer's optimal choice.
IC2
Q Good X
Substitution Effect
The document discusses concepts of utility theory including cardinal and ordinal utility, law of diminishing marginal utility, indifference curves, and consumer equilibrium. It provides explanations and diagrams to illustrate:
- The law of diminishing marginal utility and how total utility and marginal utility are related.
- Indifference curves and how they represent combinations of goods that provide the same level of satisfaction.
- How a consumer reaches equilibrium where marginal utility per dollar spent is equal across all goods, given prices and income.
- How changes in income or prices can shift the budget line or indifference curves and impact equilibrium.
Consumer's equilibrium through Utility Analysis and IC Analysiscooldeep22
Consumer's equilibrium can be analyzed using two approaches - utility analysis and indifference curve analysis.
Utility analysis uses the concepts of total utility, marginal utility and marginal utility of money to determine the quantity of a good a consumer will purchase to maximize satisfaction. Indifference curve analysis uses indifference curves to graphically represent combinations of goods that provide equal satisfaction to a consumer. It helps determine the optimal combination of goods a consumer will choose based on their budget.
The key concepts are: (1) Equilibrium occurs when the marginal utility per rupee spent equals the marginal utility of money for each good, (2) Indifference curves depict combinations that provide equal satisfaction, with higher curves indicating greater satisfaction, and (3)
This document discusses consumer behavior and utility analysis. It defines consumer behavior as how consumers allocate their income to purchase different goods and services, taking into account prices. It also covers consumer choice and budget constraints, preferences, rational behavior, and the budget constraint. The document then discusses the cardinal and ordinal approaches to analyzing consumer behavior, including concepts like total utility, marginal utility, indifference curves, marginal rate of substitution, and the law of diminishing marginal utility. Graphs and examples are provided to illustrate key concepts in consumer behavior theory.
Utility refers to the ability of a good or service to satisfy a want. The document discusses several key concepts regarding utility:
- Utility is subjective and relative to the individual. It is also independent of morality.
- Total utility is the sum of utility from consuming all units of a good. Marginal utility is the additional utility from consuming one more unit.
- The law of diminishing marginal utility states that as consumption increases, the marginal utility of additional units declines and can become negative.
- Consumer equilibrium occurs when the marginal utility per rupee spent equals the marginal utility of money, maximizing satisfaction within a budget constraint.
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.
This document summarizes key concepts in managerial economics including:
- Cardinal utility which assumes utility can be quantitatively measured in utils. Total utility is the sum of utility from consuming different units of a good.
- Limitations of the cardinal utility approach include utility being subjective and non-additive.
- Ordinal utility which ranks preferences rather than attaching quantitative measurements.
- The law of demand which states that as price increases, quantity demanded decreases, assuming other factors remain unchanged.
- Demand schedules and demand curves which graphically depict the relationship between price and quantity demanded.
Key concepts covered include the law of diminishing marginal utility, the principle of equi-marginal utility, properties of indifference curves, and how budget lines represent the constraints consumers face when making choices.
IC2
Q Good X
Substitution Effect
The document discusses concepts of utility theory including cardinal and ordinal utility, law of diminishing marginal utility, indifference curves, and consumer equilibrium. It provides explanations and diagrams to illustrate:
- The law of diminishing marginal utility and how total utility and marginal utility are related.
- Indifference curves and how they represent combinations of goods that provide the same level of satisfaction.
- How a consumer reaches equilibrium where marginal utility per dollar spent is equal across all goods, given prices and income.
- How changes in income or prices can shift the budget line or indifference curves and impact equilibrium.
Consumer's equilibrium through Utility Analysis and IC Analysiscooldeep22
Consumer's equilibrium can be analyzed using two approaches - utility analysis and indifference curve analysis.
Utility analysis uses the concepts of total utility, marginal utility and marginal utility of money to determine the quantity of a good a consumer will purchase to maximize satisfaction. Indifference curve analysis uses indifference curves to graphically represent combinations of goods that provide equal satisfaction to a consumer. It helps determine the optimal combination of goods a consumer will choose based on their budget.
The key concepts are: (1) Equilibrium occurs when the marginal utility per rupee spent equals the marginal utility of money for each good, (2) Indifference curves depict combinations that provide equal satisfaction, with higher curves indicating greater satisfaction, and (3)
This document discusses consumer behavior and utility analysis. It defines consumer behavior as how consumers allocate their income to purchase different goods and services, taking into account prices. It also covers consumer choice and budget constraints, preferences, rational behavior, and the budget constraint. The document then discusses the cardinal and ordinal approaches to analyzing consumer behavior, including concepts like total utility, marginal utility, indifference curves, marginal rate of substitution, and the law of diminishing marginal utility. Graphs and examples are provided to illustrate key concepts in consumer behavior theory.
Utility refers to the ability of a good or service to satisfy a want. The document discusses several key concepts regarding utility:
- Utility is subjective and relative to the individual. It is also independent of morality.
- Total utility is the sum of utility from consuming all units of a good. Marginal utility is the additional utility from consuming one more unit.
- The law of diminishing marginal utility states that as consumption increases, the marginal utility of additional units declines and can become negative.
- Consumer equilibrium occurs when the marginal utility per rupee spent equals the marginal utility of money, maximizing satisfaction within a budget constraint.
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.
This document summarizes key concepts in managerial economics including:
- Cardinal utility which assumes utility can be quantitatively measured in utils. Total utility is the sum of utility from consuming different units of a good.
- Limitations of the cardinal utility approach include utility being subjective and non-additive.
- Ordinal utility which ranks preferences rather than attaching quantitative measurements.
- The law of demand which states that as price increases, quantity demanded decreases, assuming other factors remain unchanged.
- Demand schedules and demand curves which graphically depict the relationship between price and quantity demanded.
Key concepts covered include the law of diminishing marginal utility, the principle of equi-marginal utility, properties of indifference curves, and how budget lines represent the constraints consumers face when making choices.
Presentation for Indifference curve analysis: Ordinal utility approach.
This presentation is made for the purpose of education & knowledge.
in this presentation we got to know about definition of indifference curve, assumption, indifference schedule, indifference curve, marginal rate of substitution, properties of indifference curve
The document discusses theories of consumer behavior and choice. It covers:
1) The cardinal and ordinal approaches to measuring utility, with the cardinal approach assigning numeric values to utility and the ordinal only ranking preferences.
2) Concepts of total utility, marginal utility, and the law of diminishing marginal utility.
3) How consumers aim to maximize utility subject to budget constraints, reaching equilibrium where the marginal utility per price is equal for all goods.
4) Tools for analyzing consumer choice including indifference curves, budget lines, and how changes in prices and income affect equilibrium.
The document discusses the law of diminishing marginal utility. It states that as consumption of a good increases, the marginal utility (additional satisfaction) from each additional unit decreases. This is because wants are unlimited but individual wants can be satisfied. The marginal utility curve is downward sloping, showing diminishing returns to scale. An example is given of a thirsty man drinking glasses of water, where the utility declines with each additional glass. Exceptions to the law include rare goods and intoxicating substances.
This document discusses the law of diminishing marginal utility. It defines utility, total utility, and marginal utility. The law of diminishing marginal utility states that as consumption of a good increases incrementally, the satisfaction from each additional unit decreases. This is shown through an example table where the marginal utility decreases as total consumption of glasses of water increases from 1 to 6. Graphs further illustrate how total utility increases at a decreasing rate while marginal utility diminishes with increasing consumption of a commodity.
Cardinal utility assigns numerical values to satisfaction levels, while ordinal utility ranks preferences without numbers. Utility is subjective, relative to each individual, and not inherently useful or related to morality. Total utility increases initially but reaches a maximum, while marginal utility decreases with additional consumption due to diminishing returns. The law of equi-marginal utility states consumers maximize satisfaction by allocating income so the last rupee spent on each good yields equal marginal utility. Consumer surplus measures the difference between what consumers are willing to pay versus the market price actually paid.
The document discusses the concept of utility, beginning with its introduction by William Stanley Jevons and further development by Carl Menger and Leon Walras. It defines utility as the amount of satisfaction derived from consuming a commodity, noting that utility is subjective. It then discusses the characteristics of utility, the concepts of total utility, marginal utility, and their relationship. Finally, it contrasts the cardinal and ordinal approaches to utility analysis, explaining the law of diminishing marginal utility, law of equi-marginal utility, and indifference curve analysis under the ordinal approach.
This document explains the Bertrand model of competition using Coca-Cola and Pepsi as an example. The Bertrand model assumes that firms in an oligopoly compete on price rather than quantity. It describes how Joseph Bertrand improved upon the Cournot model by using price rather than quantity as the strategic variable. The model assumes firms produce differentiated products and set prices to maximize profits, resulting in an equilibrium price equal to marginal cost. However, the model makes unrealistic assumptions and may not accurately describe real-world oligopolistic competition between firms like Coke and Pepsi.
This document discusses indifference curve analysis and its key concepts. It begins by explaining that indifference curve analysis originated in the late 19th century as a way to explain consumer choice between two goods. It then provides definitions of important terms like indifference curves, indifference maps, indifference schedules, and marginal rate of substitution. The properties of indifference curves are discussed, including that they slope downward, are convex, and do not intersect. The relationship between indifference curves and budget constraints is also explained.
The document discusses cardinal and ordinal utility analysis, the law of diminishing marginal utility, consumer surplus, and the Engel curve. It explains that cardinal utility can be measured while ordinal utility focuses on preference ranking. The law of diminishing marginal utility states that the satisfaction from additional units of a good declines as consumption increases. Consumer surplus is the difference between the most one would pay and the actual price paid, representing surplus satisfaction. The Engel curve shows how spending patterns change with different income levels.
1. The document discusses consumer behavior and the law of demand from a microeconomics textbook chapter. It explains how consumers maximize their utility given budget constraints.
2. The law of diminishing marginal utility and consumers seeking to equalize marginal utility per dollar spent across goods explains consumer demand patterns.
3. Examples like the shift from LPs to CDs and the diamond-water paradox illustrate how changes in prices and marginal utility analysis impact consumer choices.
This document discusses elasticity and its application to analyzing supply and demand. It defines price elasticity of demand as the percentage change in quantity demanded given a percentage change in price. Price elasticity is computed by taking the percentage change in quantity divided by the percentage change in price. Demand can be inelastic, elastic, perfectly inelastic, or perfectly elastic depending on whether the percentage change in quantity is less than, greater than, equal to zero, or infinite compared to the percentage change in price. Income elasticity and cross price elasticity are also discussed.
This document discusses marginal utility analysis and consumer behavior theory. It defines key concepts like total utility, marginal utility, diminishing marginal utility, and explains how consumers seek to maximize utility given budget constraints. The document also discusses how consumers reach equilibrium when purchasing multiple goods, where the marginal utility per rupee is equal across goods. It shows how demand curves can be derived from marginal utility curves and outlines some limitations of the marginal utility approach.
This document compares competition and monopolies. Under competition, many small companies offer identical goods and services, with no company able to control price due to perfect information and low barriers to entry. In monopolies, a single company dominates the market and can influence price, as barriers to entry are high. The key differences are that under competition the laws of supply and demand determine price, while under monopolies a company can be a price maker. Monopolies are created through vertical and horizontal takeovers that reduce competition.
This document discusses the ordinal approach to measuring utility using indifference curves. It provides definitions and properties of indifference curves, including:
1) Indifference curves represent combinations of two goods that provide the same level of satisfaction or utility.
2) Indifference curves have a negative slope and are convex to the origin, showing that goods are imperfect substitutes and the marginal rate of substitution decreases along the curve.
3) Higher indifference curves represent higher levels of satisfaction or utility, as they contain more of one or both goods.
This document defines and explains the economic concept of utility. It begins by defining utility as the ability of a commodity to satisfy human needs. It then discusses how different commodities provide different levels of utility to different people in different situations. It also explains that marginal utility decreases with increasing consumption of a good while total utility increases at a decreasing rate. The document provides examples and formulas to illustrate these concepts. It concludes by discussing the determinants and assumptions of demand and how the law of demand states that demand curves will slope downward, showing an inverse relationship between price and quantity demanded.
This document provides an introduction to microeconomics concepts. It defines microeconomics as dealing with the behavior and decision-making of small units like individuals and firms. The key concepts discussed include: scarcity and opportunity cost and how they relate to the production possibilities curve; the factors of production and their productivity; different economic systems and the basic questions they address; and supply and demand as determinants of price and resource allocation.
The document discusses consumer behavior theory and the concept of indifference curves. It introduces three approaches to analyzing consumer behavior: Marshallian, cardinal utility, and ordinal utility. It then defines utility, explores its features and concepts like total, marginal, and diminishing utility. The document also explains indifference curves and their properties, including convexity and non-intersection. It discusses the budget line and how consumers reach equilibrium when maximizing satisfaction given prices and income.
Theory of consumer behavior cardinal approachTej Kiran
This document discusses consumer behavior theory and how consumers make choices under income constraints. It explains that consumers seek to maximize their utility, or satisfaction, from consuming goods and services. Utility is defined as the pleasure or satisfaction derived from consumption. Consumers are constrained by their incomes and must make choices within these limits. The concepts of total utility, marginal utility, diminishing marginal utility, and how consumers allocate their budgets to maximize utility are introduced. Cardinal and ordinal approaches to measuring utility are also outlined. The document provides examples and explanations of the law of diminishing marginal utility and the principle of equimarginal utility as consumers seek to optimize their satisfaction from consumption.
Utility refers to the satisfaction or benefit derived from consuming a good. The law of diminishing marginal utility states that as consumption of a good increases, the marginal utility of each additional unit decreases. The law of equi-marginal utility extends this to consumption of multiple goods, stating that a consumer will allocate their budget in a way that equalizes the marginal utility across goods. This occurs when a consumer spends their money in a way that maximizes total utility subject to their budget constraint.
This document discusses the concept of utility in economics. It defines utility as the satisfaction derived from consuming a good or service. Utility is subjective and varies between individuals. The document outlines two approaches to utility - the cardinal approach which views utility as measurable, and the ordinal approach which sees utility as only able to be compared. It also discusses total utility, marginal utility, diminishing marginal utility, and indifference curves in analyzing utility.
1) Demand analysis examines how consumer demand for a product is determined based on factors like price, income, tastes, and prices of substitutes and complements. Consumer demand at the individual and market level can be modeled using demand functions.
2) At the individual level, consumers aim to maximize utility subject to a budget constraint. They allocate spending across goods until the marginal utility per rupee is equal for all goods. At the market level, demand is the sum of individual demands and is influenced by price, income, population, and other factors.
3) Demand functions express the quantitative relationship between demand for a product and its determinants. They can be linear or nonlinear. The slope of the linear demand
This chapter discusses consumer preference and behavior in consuming goods and services. It explains that consumers can strictly prefer one bundle over another or be indifferent between bundles. Utility is defined as the satisfaction obtained from consumption and is subjective. The two main theories of utility are the cardinal and ordinal approaches. The cardinal view attempts to quantify utility while the ordinal recognizes utility can only be ranked. Indifference curves and budget constraints are used to explain how consumers maximize utility subject to their income. At the point of equilibrium, the marginal rate of substitution equals the price ratio between goods.
Presentation for Indifference curve analysis: Ordinal utility approach.
This presentation is made for the purpose of education & knowledge.
in this presentation we got to know about definition of indifference curve, assumption, indifference schedule, indifference curve, marginal rate of substitution, properties of indifference curve
The document discusses theories of consumer behavior and choice. It covers:
1) The cardinal and ordinal approaches to measuring utility, with the cardinal approach assigning numeric values to utility and the ordinal only ranking preferences.
2) Concepts of total utility, marginal utility, and the law of diminishing marginal utility.
3) How consumers aim to maximize utility subject to budget constraints, reaching equilibrium where the marginal utility per price is equal for all goods.
4) Tools for analyzing consumer choice including indifference curves, budget lines, and how changes in prices and income affect equilibrium.
The document discusses the law of diminishing marginal utility. It states that as consumption of a good increases, the marginal utility (additional satisfaction) from each additional unit decreases. This is because wants are unlimited but individual wants can be satisfied. The marginal utility curve is downward sloping, showing diminishing returns to scale. An example is given of a thirsty man drinking glasses of water, where the utility declines with each additional glass. Exceptions to the law include rare goods and intoxicating substances.
This document discusses the law of diminishing marginal utility. It defines utility, total utility, and marginal utility. The law of diminishing marginal utility states that as consumption of a good increases incrementally, the satisfaction from each additional unit decreases. This is shown through an example table where the marginal utility decreases as total consumption of glasses of water increases from 1 to 6. Graphs further illustrate how total utility increases at a decreasing rate while marginal utility diminishes with increasing consumption of a commodity.
Cardinal utility assigns numerical values to satisfaction levels, while ordinal utility ranks preferences without numbers. Utility is subjective, relative to each individual, and not inherently useful or related to morality. Total utility increases initially but reaches a maximum, while marginal utility decreases with additional consumption due to diminishing returns. The law of equi-marginal utility states consumers maximize satisfaction by allocating income so the last rupee spent on each good yields equal marginal utility. Consumer surplus measures the difference between what consumers are willing to pay versus the market price actually paid.
The document discusses the concept of utility, beginning with its introduction by William Stanley Jevons and further development by Carl Menger and Leon Walras. It defines utility as the amount of satisfaction derived from consuming a commodity, noting that utility is subjective. It then discusses the characteristics of utility, the concepts of total utility, marginal utility, and their relationship. Finally, it contrasts the cardinal and ordinal approaches to utility analysis, explaining the law of diminishing marginal utility, law of equi-marginal utility, and indifference curve analysis under the ordinal approach.
This document explains the Bertrand model of competition using Coca-Cola and Pepsi as an example. The Bertrand model assumes that firms in an oligopoly compete on price rather than quantity. It describes how Joseph Bertrand improved upon the Cournot model by using price rather than quantity as the strategic variable. The model assumes firms produce differentiated products and set prices to maximize profits, resulting in an equilibrium price equal to marginal cost. However, the model makes unrealistic assumptions and may not accurately describe real-world oligopolistic competition between firms like Coke and Pepsi.
This document discusses indifference curve analysis and its key concepts. It begins by explaining that indifference curve analysis originated in the late 19th century as a way to explain consumer choice between two goods. It then provides definitions of important terms like indifference curves, indifference maps, indifference schedules, and marginal rate of substitution. The properties of indifference curves are discussed, including that they slope downward, are convex, and do not intersect. The relationship between indifference curves and budget constraints is also explained.
The document discusses cardinal and ordinal utility analysis, the law of diminishing marginal utility, consumer surplus, and the Engel curve. It explains that cardinal utility can be measured while ordinal utility focuses on preference ranking. The law of diminishing marginal utility states that the satisfaction from additional units of a good declines as consumption increases. Consumer surplus is the difference between the most one would pay and the actual price paid, representing surplus satisfaction. The Engel curve shows how spending patterns change with different income levels.
1. The document discusses consumer behavior and the law of demand from a microeconomics textbook chapter. It explains how consumers maximize their utility given budget constraints.
2. The law of diminishing marginal utility and consumers seeking to equalize marginal utility per dollar spent across goods explains consumer demand patterns.
3. Examples like the shift from LPs to CDs and the diamond-water paradox illustrate how changes in prices and marginal utility analysis impact consumer choices.
This document discusses elasticity and its application to analyzing supply and demand. It defines price elasticity of demand as the percentage change in quantity demanded given a percentage change in price. Price elasticity is computed by taking the percentage change in quantity divided by the percentage change in price. Demand can be inelastic, elastic, perfectly inelastic, or perfectly elastic depending on whether the percentage change in quantity is less than, greater than, equal to zero, or infinite compared to the percentage change in price. Income elasticity and cross price elasticity are also discussed.
This document discusses marginal utility analysis and consumer behavior theory. It defines key concepts like total utility, marginal utility, diminishing marginal utility, and explains how consumers seek to maximize utility given budget constraints. The document also discusses how consumers reach equilibrium when purchasing multiple goods, where the marginal utility per rupee is equal across goods. It shows how demand curves can be derived from marginal utility curves and outlines some limitations of the marginal utility approach.
This document compares competition and monopolies. Under competition, many small companies offer identical goods and services, with no company able to control price due to perfect information and low barriers to entry. In monopolies, a single company dominates the market and can influence price, as barriers to entry are high. The key differences are that under competition the laws of supply and demand determine price, while under monopolies a company can be a price maker. Monopolies are created through vertical and horizontal takeovers that reduce competition.
This document discusses the ordinal approach to measuring utility using indifference curves. It provides definitions and properties of indifference curves, including:
1) Indifference curves represent combinations of two goods that provide the same level of satisfaction or utility.
2) Indifference curves have a negative slope and are convex to the origin, showing that goods are imperfect substitutes and the marginal rate of substitution decreases along the curve.
3) Higher indifference curves represent higher levels of satisfaction or utility, as they contain more of one or both goods.
This document defines and explains the economic concept of utility. It begins by defining utility as the ability of a commodity to satisfy human needs. It then discusses how different commodities provide different levels of utility to different people in different situations. It also explains that marginal utility decreases with increasing consumption of a good while total utility increases at a decreasing rate. The document provides examples and formulas to illustrate these concepts. It concludes by discussing the determinants and assumptions of demand and how the law of demand states that demand curves will slope downward, showing an inverse relationship between price and quantity demanded.
This document provides an introduction to microeconomics concepts. It defines microeconomics as dealing with the behavior and decision-making of small units like individuals and firms. The key concepts discussed include: scarcity and opportunity cost and how they relate to the production possibilities curve; the factors of production and their productivity; different economic systems and the basic questions they address; and supply and demand as determinants of price and resource allocation.
The document discusses consumer behavior theory and the concept of indifference curves. It introduces three approaches to analyzing consumer behavior: Marshallian, cardinal utility, and ordinal utility. It then defines utility, explores its features and concepts like total, marginal, and diminishing utility. The document also explains indifference curves and their properties, including convexity and non-intersection. It discusses the budget line and how consumers reach equilibrium when maximizing satisfaction given prices and income.
Theory of consumer behavior cardinal approachTej Kiran
This document discusses consumer behavior theory and how consumers make choices under income constraints. It explains that consumers seek to maximize their utility, or satisfaction, from consuming goods and services. Utility is defined as the pleasure or satisfaction derived from consumption. Consumers are constrained by their incomes and must make choices within these limits. The concepts of total utility, marginal utility, diminishing marginal utility, and how consumers allocate their budgets to maximize utility are introduced. Cardinal and ordinal approaches to measuring utility are also outlined. The document provides examples and explanations of the law of diminishing marginal utility and the principle of equimarginal utility as consumers seek to optimize their satisfaction from consumption.
Utility refers to the satisfaction or benefit derived from consuming a good. The law of diminishing marginal utility states that as consumption of a good increases, the marginal utility of each additional unit decreases. The law of equi-marginal utility extends this to consumption of multiple goods, stating that a consumer will allocate their budget in a way that equalizes the marginal utility across goods. This occurs when a consumer spends their money in a way that maximizes total utility subject to their budget constraint.
This document discusses the concept of utility in economics. It defines utility as the satisfaction derived from consuming a good or service. Utility is subjective and varies between individuals. The document outlines two approaches to utility - the cardinal approach which views utility as measurable, and the ordinal approach which sees utility as only able to be compared. It also discusses total utility, marginal utility, diminishing marginal utility, and indifference curves in analyzing utility.
1) Demand analysis examines how consumer demand for a product is determined based on factors like price, income, tastes, and prices of substitutes and complements. Consumer demand at the individual and market level can be modeled using demand functions.
2) At the individual level, consumers aim to maximize utility subject to a budget constraint. They allocate spending across goods until the marginal utility per rupee is equal for all goods. At the market level, demand is the sum of individual demands and is influenced by price, income, population, and other factors.
3) Demand functions express the quantitative relationship between demand for a product and its determinants. They can be linear or nonlinear. The slope of the linear demand
This chapter discusses consumer preference and behavior in consuming goods and services. It explains that consumers can strictly prefer one bundle over another or be indifferent between bundles. Utility is defined as the satisfaction obtained from consumption and is subjective. The two main theories of utility are the cardinal and ordinal approaches. The cardinal view attempts to quantify utility while the ordinal recognizes utility can only be ranked. Indifference curves and budget constraints are used to explain how consumers maximize utility subject to their income. At the point of equilibrium, the marginal rate of substitution equals the price ratio between goods.
This document provides an overview of microeconomics topics related to demand and supply, including the theories of demand, law of demand, demand function, elasticity of demand and supply, consumer equilibrium using utility and indifference curve approaches, and the law of demand. It defines key concepts such as utility, total utility, marginal utility, indifference curves, budget line, and examines how factors like price, income, tastes, and expectations influence individual demand. Exceptions to the law of demand like Giffen goods are also briefly discussed.
Consumer behavior is the study about how the consumer purchases various goods and services with his/her limited resources (income).
Utility:- Utility is the ability or power goods or services to satisfy the wants of a consumer.
This document discusses theories of consumer behavior, including cardinal and ordinal utility analysis. It covers cardinal utility theory developed by Alfred Marshall, which assumes utility can be quantitatively measured. It also covers ordinal utility theory and indifference curve analysis, which were developed by others to address weaknesses in cardinal utility. Indifference curves graph combinations of goods that provide equal satisfaction given constraints. The properties, marginal rate of substitution, budget constraints, and uses of indifference curves are also explained.
MG University MBA Theory of consumer behavior .ideal for MG University MBA degree 2020-22 .cardinal and ordinal utility analysis is mentioned with examples.
easy to understand very helpful for students .................................................................................................................
rights to respective owners..............................................................................................................................................................................................................................................................................................................................................................................................................................................................
Micro Theory of Consumer Behavior and Demand.pptxJaafar47
This document provides an overview of microeconomics and consumer theory. It discusses:
1) Consumer behavior can be understood by examining preferences, budget constraints, and how preferences and constraints determine choice.
2) Utility is the satisfaction from consuming goods and is subjective. There are two approaches to measuring utility - cardinal and ordinal.
3) In cardinal utility theory, utility is measured in utils and has assumptions like diminishing marginal utility. In ordinal utility theory, utility is ranked and shown through indifference curves.
4) Consumer equilibrium occurs when marginal utility per dollar spent is equal across goods, or when marginal utility equals price for a single good. The consumer maximizes utility subject to their budget.
These slides include the different concepts of cardinal utility analysis and briefly show the assumptions, TU and MU, Law of diminishing utility analysis, and the law of equi-marginal utility, and finally, includes the limitations of cardinal utility analysis.
Into Econ Chapter 3 -1.pptx economics handoutReshidJewar
The document discusses consumer behavior theory and demand. It explains that consumers face a problem of choice when allocating their limited income among thousands of goods. Consumer behavior theory assumes consumers will maximize their utility or satisfaction given this constraint. Utility is subjective and can be measured ordinally or cardinally. The cardinal approach assigns numeric utility values while the ordinal only ranks preferences. Indifference curves and budget lines are used to depict the consumer's optimal choice that equalizes marginal utility per dollar across goods.
Just an extension to the demand theory for ISC economics, this chapter discusses consumer equilibrium with utility approach. Especially when goods are free, priced and two commodity case.
Consumer's surplus is the excess of the price that a consumer would be willing to pay for a good over the actual price paid, according to its originator Alfred Marshall. It is measured using indifference curve analysis, which maps consumers' preferences for different combinations of goods through indifference curves that depict equal levels of satisfaction. A consumer achieves equilibrium when their budget constraint is tangent to the highest possible indifference curve, where the marginal rate of substitution between two goods equals the ratio of their prices.
The document discusses consumer equilibrium, which occurs when a consumer spends their income on commodities in a way that maximizes their satisfaction given prices. For a single commodity, equilibrium exists when marginal utility equals price. For multiple commodities, the condition is that the marginal utility per rupee spent is equal across all goods. An example shows a consumer in equilibrium purchasing amounts of goods X and Y that equalize marginal utility per rupee spent on each.
THEORY OF CONSUMER BEHAVIOR AND DEMAND.pptxJaafar47
The document provides an overview of microeconomics course content covering consumer behavior and demand theory. It discusses the assumptions of consumer choice, the cardinal and ordinal approaches to measuring utility, indifference curves and budget constraints. Specifically, it introduces concepts like total utility, marginal utility, the law of diminishing marginal utility, consumer equilibrium and the derivation of demand curves under the cardinalist approach. It also covers the assumptions, properties and applications of indifference curves to analyze consumer preferences under the ordinal utility theory.
This document provides an overview of consumer behavior theory, including key concepts like utility, marginal utility, indifference curves, and consumer equilibrium. It discusses utility and its characteristics, the law of diminishing marginal utility, approaches to consumer behavior, indifference curves and schedules, properties of indifference curves, budget constraints, and how consumer equilibrium is reached at the point of tangency between the budget line and the highest attainable indifference curve.
This document provides an overview of consumer equilibrium using the utility and indifference curve approaches. It discusses key concepts like utility, marginal utility, consumer surplus, indifference curves, and properties of indifference curves. Consumer equilibrium occurs where the budget line is tangent to the highest indifference curve, indicating the consumer has maximized satisfaction given their budget. The document also includes sample questions to test understanding of these concepts.
This document discusses concepts related to cardinal utility theory, including:
- The definition of utility and assumptions of cardinal utility theory
- The concepts of total utility, marginal utility, and the law of diminishing marginal utility
- Assumptions of the law of equi-marginal utility and how it relates to consumer equilibrium
- Determinants of consumer equilibrium like substitution and income effects from price changes
- Indifference curves and how they relate to budget constraints and consumer optimization
- The meaning of consumer surplus as the excess utility consumers receive over their total expenditures.
Theory of Consumer Behaviour Class 12 EconomicsAnjaliKaur3
This PPT explains the consumer behaviour topic of class 12 Economics. It will be helpful for commerce students and for Teachers looking for a teaching aid.
2022 The Theory of Utility .New ppt.pptxJQuanBruce
The document discusses the theory of consumer demand and utility theory. It explains that consumers seek to maximize utility given their budget constraints. There are two approaches to utility - the cardinal and ordinal approaches. The cardinal approach measures utility in "utils" while the ordinal only ranks preferences. The theory of marginal utility states that additional units of a good provide diminishing marginal utility. Consumers seek to equalize marginal utility per dollar across all goods purchased to achieve equilibrium. If the price of a good changes, consumption will adjust until equilibrium is restored.
Similar to theoryofconsumerbehavior-151109140500-lva1-app6891 (1) (1).pptx (20)
The document discusses key aspects of the economic environment that influence business performance. It covers economic resources like land, labor, capital and entrepreneurship that are inputs for production. It also describes different economic systems such as capitalist, socialist, and mixed economies. Additionally, it discusses economic conditions in countries based on factors like per capita income. Economic output and business cycles, inflation, unemployment, and important economic policies that impact businesses are also summarized.
This document discusses the nature, scope, and objectives of business. It defines business and outlines the business system/process, which includes entrepreneurial activity, production, and marketing. It also categorizes businesses into those that produce goods, services, distribute goods, facilitate distribution, and deal in finance. Industries are classified based on their nature of activity and competitive structure, including monopoly, oligopoly, monopolistic competition, and perfect competition.
A business plan outlines a business idea, goals, objectives, and how they will be achieved. It is important for managing the business, obtaining financial support, securing contracts, and communicating with professionals. A typical business plan includes an executive summary, business overview, products, industry overview, marketing strategy, management, regulatory issues, risks, implementation plan, and financial plan. It should be based on research and realistic projections to convince readers.
This document discusses production decisions made by firms. It covers:
1. A firm's production technology can be represented by a production function that shows how inputs like labor and capital can be transformed into outputs.
2. In the short run, a firm may vary only one input like labor while capital is fixed, facing diminishing marginal returns.
3. In the long run, a firm can vary both inputs and their combinations are shown on isoquants maps, with marginal rate of technical substitution measuring the tradeoff between inputs.
4. Returns to scale describes how output changes when all inputs are increased proportionately, with possibilities being increasing, constant, or decreasing.
There are several main forms of business ownership including sole proprietorships, partnerships, corporations, franchises, and cooperatives. Sole proprietorships involve single owner management and unlimited liability, while partnerships have multiple owners who share risks and profits. Corporations separate owners from management and provide limited liability. Franchises allow businesses to use another's proven systems through contractual agreements. Cooperatives are owned and operated by their members. Entrepreneurs must understand the characteristics of each to select the best fit for their needs.
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বাংলাদেশের অর্থনৈতিক সমীক্ষা ২০২৪ [Bangladesh Economic Review 2024 Bangla.pdf] কম্পিউটার , ট্যাব ও স্মার্ট ফোন ভার্সন সহ সম্পূর্ণ বাংলা ই-বুক বা pdf বই " সুচিপত্র ...বুকমার্ক মেনু 🔖 ও হাইপার লিংক মেনু 📝👆 যুক্ত ..
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Date: May 29, 2024
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An import error occurs when a program fails to import a module or library, disrupting its execution. In languages like Python, this issue arises when the specified module cannot be found or accessed, hindering the program's functionality. Resolving import errors is crucial for maintaining smooth software operation and uninterrupted development processes.
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2. The Theory of
Consumer Behavior
The principle assumption upon which the
theory of consumer behavior and demand is
built is: a consumer attempts to allocate
his/her
available
limited money income among
goods and services so as to
maximize his/her utility (satisfaction).
3. UTILITY
• Utility - amount of satisfaction derived from the
consumption of a commodity
It is the power or capacity of a commodity to satisfy
human wants.
measurement units utils
Useful for understanding the demand side of the
market.
•
•
•
4. Utility Concepts:
◦ The Cardinal Utility Theory (Utility
approach)
analysis
Utility is measurable in a cardinal sense
Cardinal utility - assumes that we can assign
values for utility, E.g., derive 100 utils from
eating a slice of pizza
◦ The Ordinal Utility Theory (Indifference curve
approach)
Utility is not measurable in an ordinal sense
Ordinal utility approach - does not assign values,
instead works with the order of preference of
consumers for the goods.
It indicates consumers preference or choice for
one commodity over another.
5. The Cardinal Approach
●Total utility (TU) –
● The overall level of satisfaction derived from consuming a good or service. It
may be defined as the sum of the utility derived from each unit consumed of the
commodity.
● If consumer consumes four units of a commodity derives U1, U2, U3, U4 utils
from the successive units consumed, then
TU = U1 + U2 + U3 + U4
●Marginal utility (MU) -
● Additional satisfaction that an individual derives from consuming an additional
unit of a good or service.
additional unity of a
● It is the addition to TU derived from the consumption of
commodity.
● Formula :
MU = Change in total utility
Change in quantity
= ∆ TU
∆ Q
6. The Cardinal Approach
𝗈Law of Diminishing Marginal Utility = As
more and more units of a commodity are
consumed, marginal utility derived from each
successive unit goes on falling.
𝗈Assumptions of the law-
1.The units of the goods must be standard e.g. a cup
of tea or a bottle of coke, not sip of tea and coke.
remains
2.Consumers taste and preference
unchanged.
3.There must be continuity in consumption.
4.The mental condition of consumers
normal during consumption.
remains
8. Continue….
●When TU is rising,
MU is falling but it is
greater than zero
(+ve).
●When
maximum,
zero.
TU is
MU is
●And when TU starts
declining, MU
becomes negative.
9. Consumer Equilibrium:
Cardinal utility approach
definition
𝗈It means a situation under which consumer spends his
given income on purchase of a commodity in such a
way that gives him maximum utility (satisfaction) and
he feels no urge to change.
𝗈It is a position of rest because he does not want
consume less or more than that.
𝗈A consumer attains his equilibrium when he
maximizes his TU given his income, consumption
expenditure and price of the commodity he consumes.
10. Assumptions
• Rationality- He satisfies his wants in the order of
their utility.
• Limited money income
• Maximization of satisfaction
• Diminishing MU
• Constant MU of money explanation from book
• Favourite
11. Consumer Equilibrium: A
single commodity case
• Consumer equilibrium in purchase of a single good is
attained when:
MU in terms of money = price of the commodity
i.e., MU of a product / MU of a rupee = price of a
product.
A consumer while purchasing a good will compare its
price (cost) with is expected utility(benefits).
He will buy the good if the benefit derived in form of
utility is greater than or at least equal to its price.
It is difficult to compare MU of good (utils) with its
price (Rs.), therefore MU of good is converted in
terms of money by dividing MU of good by MU of
rupee.DIAGRAM WITH EXPLANATION FROM
BOOK.
•
•
•
12. Continue..
• MU of one rupee is defined as the additional utility
when an additional rupee is spent on purchase of
commodity. Example : Let MU of a Rupee is 2 utils.
Consumer will consume 4 units of oranges to attain
equilibrium.
•
Units of
orange
consumed
MU of
orange
(utils)
MU in terms
of money
Price of
orange
1 10 10/2=5 1
2 8 4 1
3 5 2.5 1
4 2 1 1
5 1 0.5 1
6 0 0 1
13. Consumer Equilibrium: In
case of two commodities
• A rational consumer consumes commodities in
the order of their utilities.
• He picks up the commodity which yield the
highest utility and next the one which yields
second highest utility and so on…
• He switches his expenditure from one commodity
to another in accordance with their MU.
• He continues to switch till MU of each
commodity per unit of money expenditure is the
same. This is called the law of equi-MU.
14. Example
• Suppose consumer has Rs. 5 income to be
spent on two goods, each costing Re.1 per
unit. How he will attain equilibrium.
• So he will consume 3 units of oranges and 2
units of apples to get maximum satisfaction.
Rupees spent MU of oranges
(utils)
MU of apples (utils)
1 10 (1) 9 (2)
2 8 (3) 6 (4)
3 6(5) 4
4 4 2
5 2 1
15. The Law of Equi-MU
• Let us suppose that a consumer consumes
only two commodities X and Y, their
prices given as Px and Py respectively.
Following the equilibrium rule of single
commodity case, the consumer distributes
his income between commodities X and Y
such that
•
17. Continue…
𝗈Since MU of money is constant
𝗈Hence a utility maximizing consumer consumes till MU
of each commodity per unit of money expenditure is
the same.
18. The Ordinal Approach
•Economists following the lead of Hicks,
Slutsky and Pareto believe that utility is
measurable in an ordinal sense--the utility
derived from consuming a good, is a
function of the quantities of X and Y
consumed by a consumer. U = f ( X, Y )
•only reflects an order
• but the difference between the numbers
assigned is meaningless
19. Assumptions Underlying Ordinal
Approach
• Rationality: The consumer is assumed to be
rational. He aims at maximizing his benefits
from consumption, given income and prices.
all conceivable combinations
• Ordinality: The consumer is capable of
of
according to the satisfaction they
ranking
goods
yield. Thus if he is given various
combinations say A, B, C, D, E he can rank
them as first preference, second preference
and soon.
• Diminishing marginal rate of substitution:
20. • Consistency: It means if good X is
preferred over good Y inn one time, then
consumer will not prefer Y over X in
another time period.
• Transitivity of choice: If the consumer
prefers combination A to B, and B to C,
then he must prefer combination A to C. In
other words, his choices are characterised
by the property of transitivity.
• Non-satiation: If combination A has more
commodities than combination B, then A
must be preferred to B.
21. INDIFFERENCE CURVE
(IC)
• An indifference curve is the set of all
combinations of commodities X and Y that
yield the same level of total utility or
satisfaction.
• It is a curve representing different baskets
of goods giving the same utility to an
individual.
23. INDIFFERENCE MAP
• Indifference Map: A set of indifference
curves is called indifference map.
• An indifference map depicts complete picture
of consumer's tastes and preferences.
• In an figure indifference map of a consumer is
shown which consists of three indifference
curves.
25. PROPERTIES OF INDIFFERENCE
CURVE
𝗈(i) Indifference curves slope downward to the
right: This property implies that when the amount
of one good in 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.
𝗈(ii) 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.
27. PROPERTIES OF
INDIFFERENCE CURVE
• (iv) A higher indifference curve represents a
higher level of satisfaction than the lower
indifference curve: This is because
combinations lying on a higher indifference
curve contain mere of either one or both
goods and more goods are preferred to less of
them.
28. Marginal Rate of Substitution
𝗈Def.: the marginal rate of substitution, X for Y, (written
MRSXY) indicates the number of units of Y that must be given
up to acquire one additional unit of X while satisfying the
condition of constant total utility.
𝗈MRSXYis defined as the slope of the indifference curve at a
certain point.
𝗈When the MRSXYdiminishes along the indifference curve, the
indifference curve is convex.
X MUY
MRS
Y
MUX
29. BUDGET LINE
𝗈A higher indifference curve shows a higher level of
satisfaction than a lower one.
𝗈Therefore, a consumer in his attempt to maximise
satisfaction will try to reach the highest possible
indifference curve.
𝗈But in his pursuit of buying more and more goods
and thus obtaining more and more satisfaction he
has to work under two constraints : firstly, he has to
pay the prices for the goods and, secondly, he has a
limited money income with which to purchase the
goods.
30. BUDGET LINE
• These constraints are explained by
budget line or price line.
• In simple words a budget line shows all
those combinations of two goods which
the consumer can buy spending his given
money income on the two goods at their
given prices.
• All those combinations which are within
the reach of the consumer (assuming that
he spends all his money income) will lie
on the budget line.
31. BUDGET LINE
●Line showing
all combinations
of items can be
purchased for a
particular level of
income (M) ;
M =PxQx + PyQy
𝗈Slope of budget line
is Px / Py.
32. FACTORS SHIFT THE BUDGET LINE
• Changes in prices of goods X
Y
Px Px X
33. EFFECTS OF PRICE CHANGES ON
THE BUDGET LINE
●When price of good X increases, the
quantity of good X is reduced (by
maintaining the quantity of Y) & vice versa.
Points on the X axis shifted to the left (a
small quantity of X)
●When the price of Y increases, the
quantity Y is reduced (by maintaining the
quantity of X) & vice versa
Point on Y axis move to the bottom
(small quantity in Y)
34. FACTORS SHIFT THE BUDGET LINE
• Changes in the price of goods Y
Y
Py
Py
X
36. EFFECTS OF INCOME CHANGES ON
THE BUDGET LINE
• When M increases, QXand QY can be
on the X
bought even more, a point
axis shifted to the right & a point on
the Y axis move on; & vice
versa when M decreases.
37. CONSUMER
EQUILIBRIUM
• A consumer is in equilibrium when he is
deriving maximum possible satisfaction from
the goods and is in no position to rearrange his
purchases of goods. We assume that :
• (i)the consumer has a given indifference map
which shows his scale of preferences for
various combinations of two goods X and Y.
• (ii)he has a fixed money income which he has
to spend wholly on goods X and Y.
• (iii)prices of goods X and Y are given and are
fixed for him.
38. CONSUMER
EQUILIBRIUM
• To show which combination of two goods X and Y
the consumer will buy to be in equilibrium we bring
his indifference map and budget line together.
• the indifference map depicts the consumer’s
preference scale between various combinations of
two goods and the budget line shows various
combinations which he can afford to buy with his
given money income and prices of the two goods.
40. CONSUMER
EQUILIBRIUM
• IC1, IC2, IC3, IC4 and IC5 are shown together with
budget line PL for good X and good Y. Every
combination on budget line PL costs the same. Thus
combinations R, S, Q, T and H cost the same to the
consumer.
• The consumer’s aim is to maximize his satisfaction and
for this he will try to reach highest indifference curve.
• But since there is a budget constraint he will be forced
to remain on the given budget line, that is he will have
to choose any combinations from among only those
which lie on the given price line.
• Which combination will he choose?
41. CONSUMER
EQUILIBRIUM
𝗈At the tangency point Q, the slopes of the price line PL and
indifference curve IC3 are equal. The slope of the
indifference curve shows the marginal rate of substitution of
X for Y (MRSxy) which is equal to MUy / MUx while the
slope of the price line indicates the ratio between the prices
of two goods i.e., Px / Py
𝗈At equilibrium point Q,
MRSxy = MUx / MUy = Px / Py
𝗈Thus, we can say that the consumer is in equilibrium
position when 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.
42. Exceptions to the convex shape
of indifference curve
• (1) X and Y are perfect substitutes:
The two goods are perfect substitutes when the
marginal rate of substitution of one good for
another is a constant. The indifference curves
are straight lines.
• (2) X and Y are perfect
complements: The two goods are
perfect complements when the marginal
rate of substitution of one good for
another is infinite. The indifference curves are
shaped as right angles.
46. An Income-Consumption Curve
✓Income-consumption curve (ICC): for a
good X is the set of optimal bundles traced on
an indifference map as income varies
(holding the prices of Xand Y constant).
✓Engel curve:
relationship between the quantity of
curve that plots the
X
consumed and income.
48. THE IMPACT OF A PRICE
CHANGE
• Economists often separate the impact of a
price change into two components:
– the substitution effect; and
– the income effect.
• The substitution effect involves the
substitution of good x1for good x2or vice-versa
due to a change in relative prices of the two
goods.
49. Cont…
• The income effect results from an increase or
decrease in the consumer’s real income or
purchasing power as a result of the price
change.
• The sum of these two effects is called the price
effect.
• The decomposition of the price effect into the
income and substitution effect can be done in
several ways: The Hicksian method.
50. Y (units)
X (units)
0
X
P = 4 PX = 2
PX = 1
A
X =2 B
X =10 C
X =16
•
• •
10
Price consumption curve
20
The price consumption curve for good x plots
all the utility maximization points as the price of
x changes. This reveals an individual’s demand
curve for good x.
The Price Consumption
Curve
51. Individual Demand
Curve for X
X
PX
XA=2 XB=10 XC=16
PX = 2
The points found on the price consumption
curve produce the typically downward-sloping
demand curve we are familiar with.
PX = 4 •
X
P = 1
•
• U increasing
52. THE HICKSIAN METHOD
• Sir John R.Hicks (1904-1989)
• Awarded the Nobel Laureate in Economics
(with Kenneth J. Arrrow) in 1972 for work
on general equilibrium theory and welfare
economics.
56. THE HICKSIAN METHOD
• To isolate the substitution effect we ask….
“what would the consumer’s optimal bundle be if
s/he faced the new lower price for X1 but
experienced no change in real income?”
This amounts to returning the consumer
original indifference curve (I1)
• to the
59. THE HICKSIAN METHOD
X2
X1
Ec I1
I2
xa xc xb
Ea
Eb
The new optimum on I1 is at Ec.
The movement from Ea to Ec (the
increase in quantity demanded from
Xa to Xc) is solely in response to a
change in relative prices
61. THE HICKSIAN METHOD
• To isolate the income effect …
• Look at the remainder of the total price effect
• This is due to a change in real income.
62. THE HICKSIAN METHOD
X2
X1
I2
Income Effect
Ea
Eb
Ec
I1
The remainder of the total effect is
due to a change in real income. The
increase in real income is
evidenced by the movement from I1
to I2
Xc
Xb
67. The individual’s demand curve can be seen as the
individual’s willingness to pay curve.
On the other hand, the individual must only actually pay the
market price for (all) the units consumed.
For example, you may be willing to pay $40 for a haircut,
but upon arriving at the stylist, discover that the price is only
$30
The difference between willingness to pay and the amount
you pay is the Consumer Surplus
68. Definition: The net economic benefit to the
consumer due to a purchase (i.e. the willingness to
pay of the consumer net of the actual expenditure on
the good) is called consumer surplus.
The area under an ordinary demand curve and above
the market price provides a measure of consumer
surplus.
Note that a consumer will receive more surplus from
the first good than from the last good.
70. Efficiency of the Equilibrium Quantity
D
10
$8
This calculation
Only works for
A linear demand
curve
Quantity
Consumer
Surplus
Consumer Surplus = area of triangle
=1/2bh
=1/2(16-8)(10)
=40
Price
$16