1.

Consumer Behavior:- "The study of individuals, groups, or organizations and the

processes they use to select, secure, use, and dispose of products, services, experiences,
or ideas to satisfy needs and the impacts that these processes have on the consumer and
society."
-Consumer behavior is the science, that studies why, when, where and how individual
customers, buy, select and use goods or services to satisfy their needs.

Consumer Behaviour is a branch which deals with the various stages a consumer goes
through before purchasing products or services for his end use.

2. Consumer choice:- Consumer choice refers to the decisions that consumers make
with regard to products and services. When we study consumer choice behavior, we
examine how consumers decide which products to purchase or consume over time.
3. Consumer preference:- Consumer preferences are defined as the subjective (individual)
tastes, as measured by utility, of various bundles of goods. They permit the consumer to
rank these bundles of goods according to the levels of utility they give the consumer.
Note that preferences are independent of income and prices. Ability to purchase goods
does not determine a consumer’s likes or dislikes. One can have a preference for
Porsches over Fords but only have the financial means to drive a Ford. These preferences
can be modeled and mapped through the use of indifference curves. In order to
graphically portray consumer preferences, we need to define some terms.
4. Utility:- The utility definition in economics is derived from the concept of usefulness. An
economic good yields utility to the extent to which it's useful for satisfying a consumer’s
want or need. Various schools of thought differ as to how to model economic utility and
measure the usefulness of a good or service. Utility in economics was first coined by the
noted 18th-century Swiss mathematician Daniel Bernoulli. Since then, economic theory
has progressed, leading to various types of economic utility.
From the consumer’s perspective, it means a psychological feeling of pleasure,
satisfaction, well-being, happiness which consumer expects to derive from the
possession, consumption and the use of the commodity.
 Utility theory is an economic hypothesis that postulates the fact that consumers make
purchase decisions based in the degree of utility or satisfaction they obtain from a given
 item. This means that the higher the utility level the higher the item will be prioritized in
the consumer’s budget.
5. Budget constraint:- The line p1x1 + p2x2 = m is often referred to as the budget line. – It
shows the maximum possible amounts that can be spent on the two goods.

A budget constraint occurs when a consumer is limited in consumption patterns by a certain

income.

he limit to expenditure. For any economic agent, whether an individual, a firm, or a

government, expenditure must stay within limits set by the ability to finance it. In a single-
period setting no borrowing or lending can take place, so expenditure cannot exceed the sum
of initial wealth and income earned within the period. With more than one period,
the budget constraint must take account of the ability of the agent to transfer wealth across
periods by borrowing and lending. When there is a perfect capital market, the rate of interest
for borrowing is equal to the rate for lending and each agent can borrow or lend as much as
they wish. The budget constraint then requires that the ... ...

6. Budget line:- A graph showing what combinations of quantities of two goods can be
afforded by a consumer with a fixed total amount to spend. If each good is available in
any quantity at a fixed price per unit, the budget line is a straight line with a slope equal
to the relative price of the two goods....
A budget line shows the combination of goods that can be afforded with your current
income.
7. indifference curve is a line showing all the combinations of two goods which give a
consumer equal utility. In other words, the consumer would be indifferent to these
different combinations.
8. Marginal utility:- Marginal utility is the added satisfaction that a consumer gets from
having one more unit of a good or service. The concept of marginal utility is used by
economists to determine how much of an item consumers are willing to purchase.
Positive marginal utility occurs when the consumption of an additional item increases the
total utility. On the other hand, negative marginal utility occurs when the consumption of
one more unit decreases the overall utility.
9. refers to the willingness and ability of consumers to purchase a given quantity of a
good or service at a given point in time or over a period in time.

In economics, demand is formally defined as ‘effective’ demand meaning that it is a

consumer want or a need supported by an ability to pay – namely a budget derived
from disposable income. Income provides individuals with a purchasing power
which they excercise in a market through effective demand.
10. The marginal rate of substitution is the number of units a consumer is willing to give
up of one good in exchange for units of another good and remain equally satisfied. The
substitution doesn't indicate a preference in goods, only that the consumer is willing to
give up units of one good for additional units of another good. In this case, Brandy is
willing to give up a certain amount of handbags for each additional pair of shoes she
would like to buy, as long as she doesn't have to compromise her total satisfaction.
11. Optimum of a consumer:- A consumer optimum represents a solution to a problem facing
all individuals -- maximizing the satisfaction (utility) from consuming different goods
and services subject to the constraint of household income and product prices. This
problem can be described as follows:
max U = f(X,Y)

s.t. Px(X) + Py(Y) < I

12. Explain the assumptions of consumer’s preference.
(1) Preferences are complete: this means that the consumer is able to compare and rank all
possible baskets of goods and services. (2) Preferences are transitive: this means that preferences
are consistent, in the sense that if bundle A is preferred to bundle B and bundle B is preferred to
bundle C, then bundle A is preferred to bundle C. (3) More is preferred to less: this means
that all goods are desirable, and that the consumer always prefers to have more of each
good. (4) Diminishing marginal rate of substitution: this means that indifference curves are
convex, and that the slope of the indifference curve increases (becomes less negative) as we
move down along the curve. As a consumer moves down along her indifference curve she
is willing to give up fewer units of the good on the vertical axis in exchange for one more
unit of the good on the horizontal axis. This assumption also means that balanced market
 baskets are generally preferred to baskets that have a lot of one good and very little of the
other good
13.

1. They Slope Negatively or Slope Downwards from the Left to the Right:
This is an important feature of Indifference Curve. If the total satisfaction is to remain the same,
the consumer must part with a diminishing number of bananas as he gets as increasing stock of
oranges. The loss of satisfaction to the consumer on account of the downward movement must be
made up by the gain through the rightward movement. As such the Indifference Curve must
slope downwards to the right.

ADVERTISEMENTS:

In this diagram at P, the consumer obtains OM of oranges and ON of bananas. AQ, he gets the
same OM. Quantity of oranges, but ON1 of bananas. He secures greater total satisfaction of X
than at P. He cannot therefore indifferent between P and Q. Thus it is proved that an Indifference
Curve cannot slope upward to the right, nor can it be horizontal or vertical. The only possibility
is that it must slope downwards to the right. The consumer will get additional supplies of oranges
by sacrificing diminishing quantities of bananas.
2. They are Convex to the Origin of Axes:
The second property of the Indifference Curve is that they are generally convex to the origin of
the axes—the left hand portion is normally steep while the right hand portion is relatively flat.
This property of the Indifference Curve is derived from the Law of Diminishing Marginal Rate
of Substitution. The marginal rate of substitution neither increases nor does it remain constant.

If the marginal rate of substitution had increased, the Indifference Curve would have been
concave to the origin. If the marginal rate of substitution had remained constant, the Indifference
Curve would have been a diagonal straight line at 45° angle. The marginal do not rate of
substitution increases nor does it remain constant. The marginal rate of substitution on the
contrary goes on diminishing. So the Indifference Curve has to be convex to the origin of axes.

ADVERTISEMENTS:

In this diagram, an increase of oranges from OM to OM1 is accompanied by a progressively

diminishing number of bananas from ON to ON1. Thus a falling curve whose slope diminishes as
we move to the right is bound to be convex to the origin to axes.
3. Every Indifference Curve to the right represents Higher Level of Satisfaction than that
of the Proceeding One:
Let us take two Indifference Curves IC1 and IC2 lying to the right of IC1. At the point P the
consumer gets OM of oranges and ON of bananas. At the point Q though the number of bananas
remains the same i.e., ON, yet the number of oranges increases from OM to OM1. The total
satisfaction of the consumer is therefore bound to be greater at Q than at P.

Hence Q represents a more valued and preferred combination of oranges and bananas than P. As
all the points on one Indifference Curve represents equal satisfaction, therefore every point on
IC2 represents a combination, preferred to that represented by any point on IC. An Indifference
Curve to the right represents a preferred position and therefore a consumer will always try to
move on the indifference map as much to the right as possible.
4. Indifference Curves can neither touch nor Intersect each other, so that one Indifference
Curve Passes through only one Point on an Indifference Map:
ADVERTISEMENTS:

The fourth property of Indifference Curve is that no two Indifference V’ Curves can ever cut
each other.
Since point A is an Indifference Curve IC2, it represents a higher level of satisfaction to the
consumer c than point B which is located on the lower Indifference c Curve IC1. Point C,
however lies on both the curves. This m means that two levels of satisfaction, A and B which are
by definition unequal manage to become equal at the point C. This is clearly impossible.
Indifference Curve can never intersect each other:
5. Indifference Curves are not Necessarily Parallel to each other. Although, they are Falling
and Negatively Inclined to the Right:
Yet the rate of the fall will not be the same for all Indifference Curves.

This is due to two reasons:

Firstly, the Indifference Curves are not based on the cardinal measurability of utility. Secondly,
the rate of substitution between the two commodities need not be the same in all the indifference
schedules. It is therefore not necessary that the Indifference Curves should be parallel to each
other.

6. In reality, Indifference Curves are like Bangles:

But as a matter of principle their effective region is in the form of segments. This is so because
Indifference Curves are assumed to be negatively sloping and convex to the origin. An individual
can move to the higher indifference. Curves I2 and I3, until he reaches the saturation upon S
where his total utility is the maximum. If the consumer increases his consumption beyond X and
Y his total utility will fall.