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    Consumer Behaviour Utility Analysis

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    sunil020982
    The document discusses key concepts in consumer behavior and utility analysis including: 1) Utility refers to the satisfaction derived from consuming a good or service. The law of diminishing marginal utility states that the marginal utility of additional units of a good decreases as consumption increases. 2) Total utility is the sum of marginal utilities, and consumers seek to allocate their budget in a way that equalizes marginal utility per rupee spent, as described by the law of equi-marginal utility. 3) Indifference curves illustrate different combinations of goods that provide equal utility, and the budget constraint shows affordable combinations given prices and income.

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    Consumer Behaviour Utility Analysis

    Uploaded by

    sunil020982
    54 views28 pages
    The document discusses key concepts in consumer behavior and utility analysis including: 1) Utility refers to the satisfaction derived from consuming a good or service. The law of diminishing marginal utility states that the marginal utility of additional units of a good decreases as consumption increases. 2) Total utility is the sum of marginal utilities, and consumers seek to allocate their budget in a way that equalizes marginal utility per rupee spent, as described by the law of equi-marginal utility. 3) Indifference curves illustrate different combinations of goods that provide equal utility, and the budget constraint shows affordable combinations given prices and income.

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    The document discusses key concepts in consumer behavior and utility analysis including: 1) Utility refers to the satisfaction derived from consuming a good or service. The law of diminishing marginal utility states that the marginal utility of additional units of a good decreases as consumption increases. 2) Total utility is the sum of marginal utilities, and consumers seek to allocate their budget in a way that equalizes marginal utility per rupee spent, as described by the law of equi-marginal utility. 3) Indifference curves illustrate different combinations of goods that provide equal utility, and the budget constraint shows affordable combinations given prices and income.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    54 views28 pages

    Consumer Behaviour Utility Analysis

    Uploaded by

    sunil020982
    The document discusses key concepts in consumer behavior and utility analysis including: 1) Utility refers to the satisfaction derived from consuming a good or service. The law of diminishing marginal utility states that the marginal utility of additional units of a good decreases as consumption increases. 2) Total utility is the sum of marginal utilities, and consumers seek to allocate their budget in a way that equalizes marginal utility per rupee spent, as described by the law of equi-marginal utility. 3) Indifference curves illustrate different combinations of goods that provide equal utility, and the budget constraint shows affordable combinations given prices and income.

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    Consumer Behavior : Utility Analysis

    Utility

    Utility refers to want satisfying power of a commodity. In objective terms, utility may be defined as the amount of satisfaction derived from a commodity or service at a particular time. Assumptions:
    Utility can be measured. Marginal Utility of money remains constant No change in income of the consumer, his taste & fashion to be constant No substitute Independent marginal utility of each unit of commodity

    Total Utility (TU) and Marginal Utility (MU)


    Total Utility refers to the total satisfaction derived by the consumer from the consumption of a given quantity of a good. TU = Sum of all MU

    Marginal utilityMUrefers the additional satisfaction from one more unit of consumption
    The exponents of the utility analysis have developed two laws which occupy a very important place in economics theory and they are :# Law of Diminishing Marginal Utility # Law of Equi-Marginal Utility

    Cardinal Utility & Ordinal Utility

    Cardinal utility believes that utility


    could be measured & added (utility unit & marginal analysis);

    Ordinal utility holds that utility


    could only be ordered and cannot be measured (indifference curve).

    Law of Diminishing Marginal Utility

    Though wants of an individual are unlimited in number yet each individual want is satiable. Because of this, the more we have a commodity, the less we want to have more of it. This law state that as the amount consumed of a commodity increases, the utility derived by the consumer from the additional units, i.e marginal utility goes on decreasing. According to Marshall, The additional benefit a person derives from a given increase of his stock of a thing diminishes with every increase in the stock that he already has

    Law of Diminishing Marginal Utility


    Explanation: As more and more quantity of a commodity is consumed, the intensity of desire decreases and also the utility derived from the additional unit. Assumptions: All the units of a commodity must be same in all respects The unit of the good must be standard There should be no change in taste during the process of consumption There must be continuity in consumption There should be no change in the price of the substitute goods

    Relationship between MU and TU Units of a goods Marginal Total consumed Utility (MU) utility (TU) 1 6 6 2 4 10 3 2 12 4 0 12 5 -2 10 6 -4 6

    Law of Equi-Marginal Utility

    This law states that the consumer maximizing his total utility will allocate his income among various commodities in such a way that his marginal utility of the last rupee spent on each commodity is equal. Or The consumer will spend his money income on different goods in such a way that marginal utility of each good is proportional to its price

    MU of A / P of A = MU of B / P of B

    Limitations of Law of Equi-Marginal Utility

    It is difficult for the consumer to know the marginal utilities from different commodities because utility cannot be measured. # Consumer are ignorant and therefore are not in a position to arrive at an equilibrium. # It does not apply to indivisible and inexpensive commodity.
    #

    Equi Marginal Utility Marginal Utility of Marginal Utility Rupee Apples of Oranges 1 10 7 2 8 6 3 6 5 4 4 4 5 2 3 Total Money available is Rs.5 to be spent on Apples and Oranges. Price of both comodities is Re.1 per unit.

    Indifference curve
    A locus of points representing different bundles of goods and services, each of which yields the same level of total utility.

    Constructing an indifference curve


    30 28 26 24 22 20 18 16 14 12 10 8 6 4 2 0

    Pears Oranges 30 24 20 14 10 8 6 6 7 8 10 13 15 20

    Point a b c d e f g

    Pears

    10

    12

    14

    16

    18

    20

    22

    Oranges

    Deriving the marginal rate of substitution 30 a (MRS)


    26

    Units of good Y

    20

    10

    0 0
    67

    10

    20

    Units of good X

    Deriving the marginal rate of substitution 30 a (MRS) DY = 4 MRS = 4


    26

    b DX = 1

    Units of good Y

    20

    10

    0 0
    67

    10

    20

    Units of good X

    Deriving the marginal rate of substitution 30 a (MRS) DY = 4 MRS = 4


    26

    b DX = 1

    Units of good Y

    20

    10 9

    DY = 1

    MRS = 1 d

    DX = 1

    0 0
    67

    10

    13 14

    20

    Units of good X

    30 An indifference map

    Units of good Y

    20

    10

    I5 I2
    20

    I3

    I4

    0 0 10

    I1 Units of good X

    30 a A budget line
    Units of good X Units of Point on good Y budget line
    30 20 10 0

    Units of good Y

    20

    0 5 10 15

    a b

    10

    Assumptions PX = 2 PY = 1 Budget = 30

    0 0 5 10 15 20

    Units of good X

    Effect of an increase in income on the 40 budget line Assumptions


    30

    Units of good Y

    PX = 2 PY = 1 Budget = 40

    20
    16

    10

    Budget = 40 Budget = 30
    0 5
    7

    0 10

    15

    20

    Units of good X

    Effect on the budget line of a fall in the price 30 a of good X Assumptions


    Units of good Y
    20
    PX = 1 PY = 1 Budget = 30

    10

    B1
    0 0 5 10

    B2
    b c
    20 25 30

    15

    Units of good X

    Finding the optimum consumption

    Units of good Y

    Budget line

    I5 I2 I3 I4

    I1 O Units of good X

    Same slope at t of indifference curve and budget line


    r s Units of good Y

    Y1

    u v I1 O X1 Units of good X I2 I3

    I5 I4

    Effect on consumption of a change in income

    Units of good Y

    B1 O Units of good X

    I1

    Effect on consumption of a change in income

    Units of good Y

    B1 O

    B2

    I1

    I2

    Units of good X

    Effect on consumption of a change in income

    Units of good Y

    I4 I3 B1 O Units of good X B2 B3 B4 I1 I2

    Effect on consumption of a change in income

    Units of good Y

    Incomeconsumption curve

    I4 I3 B1 O Units of good X B2 B3 B4 I1 I2

    30 Effect of a fall in the price of good X


    Assumptions PX = 2 PY = 1 Budget = 30

    Units of good Y

    20

    10

    0 0 5 10

    B1
    15 20 25

    I1
    30

    Units of good X

    30 Effect of a fall in the price of good X a


    Assumptions PX = 1 PY = 1 Budget = 30

    Units of good Y

    20

    k j

    10

    I2

    0 0 5 10

    B1
    15 20 25

    I1

    B2
    30

    Units of good X

    30 Effect of a fall in the price of good X a

    Priceconsumption curve Units of good Y


    20

    k j

    10

    I2

    0 0 5 10

    B1
    15 20 25

    I1

    B2
    30

    Units of good X

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