CONSUMER BEHAVIOUR
KEY POINT:CONSUMER BEHAVIOR
-CONSUMER BEHAVIOR APPROACHES)
*ORDINAL APPROACH (INDIFFERENCE CURVE)
*CARDINALS APPROACH (UTILITIES)
- CONSUMER PREFERENCES
- FOCTORS INFLUENCING CONSUMER BEHAVIOUR
- DEFINITION AND ASSUMPTIONS (TWO COMM(X,Y),Px,Py,AND Y
- BUDGET LINE AND INDIFFERENCE CURVE
- THE BUDGET EQUATION
- OPTIMAL CHOICES OF GOODS / CONSUMER EQUILIBRIUM
- INDIFFERENCE MAP
- SHIFT IN BUDGET LINE (DUE TO CHANGE OF PRICE AND
INCOME)
* EFFECT OF PRICE CHANGE (SUBSTITUTION EFFECT _PCC)
* EFFECT OF INCOME EFFECTS (INCOME EFFECTS YCC)
CONSUMER BEHAVIOUR
Meaning
A CONSUMER: is a person or household that buys a final product for use.
CONSUMER BEHAVIOUR: is a study of how individual customers, groups or
organizations select buy , use, and dispose ideas goods and services to satisfy
their needs or wants.
Understanding consumer behavior is a key element of market strategy. In fact
before implementing a strategy it is essential to fully understand the needs and
expectations of the consumers you want to influence.
Categories of consumer behavior
-complex buying behavior
-habitual buying behavior
-Variety seeking behavior
- Dissonance-reducing behavior
CONSUMER BEHAVIOUR
CONSUMER BEHAVIOR APPROACHES
* Ordinal approach/ indifference curve: is a graph showing a combination of
two goods that gives a consumer equal satisfaction and utility.
REQUIREMENTS TO STUDY ORDINAL APPROACH
# PREFERENCE OF TWO COMMODITIES (X,Y)
# EXISTANCE OF TWO COMMODITIES (X,Y)
# DEFINED BUDGETY
# PRICE AND QUANTITY X
# PRICE AND QUANTITY Y
BUDGET LINE: The budget line is a graphical delineation of all possible
combinations of the two commodities that can be bought with provided income
and cost so that the price of each of these combinations is equivalent to the
monetary earnings of the customer.
Budget Line: Meaning, Definition, Example - Byjus
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CONSUMER BEHAVIOUR
FEATURES OF BUDGET LINE
Straight Line - The straight line indicated in the budget line signifies the
existing market exchange rate for every combination shown. Negative Slope The negative downward slope of the budget line shows the inverse relationship
between the purchase of two commodities.
Y=px*qx+py*qy
Budget Line - Definition, Equation, Example, Features and ...
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Example of budget line
Income of Juma is 10000. He consume beans and rice . A kilo of beans is Frw
200 and a kilo of rice is Frw 500. If he decides to use all income to buy rice , he
can buy 20 kilos. If he decides to use all the income to buy beans , he can buy
50 kilos .
Solution on the blackboard
CONSUMER BEHAVIOUR
INDIFFIRENCE CURVE:
What is an Indifference Curve?
An indifference curve is a curve that represents all the combinations of goods
that give the same satisfaction to the consumer. Since all the combinations give
the same amount of satisfaction, the consumer prefers them equally. Hence the
name indifference curve.
Here is an example to understand the indifference curve better. Peter has 1 unit
of food and 12 units of clothing. Now, we ask Peter how many units of clothing is
he willing to give up in exchange for an additional unit of food so that his level of
satisfaction remains unchanged.
Peter agrees to give up 6 units of clothing for an additional unit of food. Hence,
we have two combinations of food and clothing giving equal satisfaction to Peter
as follows:
1. 1 unit of food and 12 units of clothing
2. 2 units of food and 6 units of clothing
By asking him similar questions, we get various combinations as follows:
Combination
Food
Clothing
A
1
12
B
2
6
C
3
4
CONSUMER BEHAVIOUR
D
4
3
Graphical Representation:
The diagram shows an Indifference curve (IC). Any combination lying on this
curve gives the same level of consumer satisfaction. Another name for it is IsoUtility Curve.
Indifference Map
An Indifference Map is a set of Indifference Curves. It depicts the complete
picture of a consumer’s preferences. The following diagram showing an
indifference map consisting of three curves:
CONSUMER BEHAVIOUR
We know that a consumer is indifferent among the combinations lying on the
same indifference curve. However, it is important to note that he prefers the
combinations on the higher indifference curves to those on the lower ones.
This is because a higher indifference curve implies a higher level of satisfaction.
Therefore, all combinations on IC1 offer the same satisfaction, but all
combinations on IC2 give greater satisfaction than those on IC1.
Marginal Rate of Substitution
This is the rate at which a consumer is prepared to exchange a good X for Y. If we
go back to Peter’s example above, we have the following table:
Combination
Food
Clothing
MRS
A
1
12
–
CONSUMER BEHAVIOUR
B
2
6
6
C
3
4
2
D
4
3
1
In this example, Peter initially gives up 6 units of clothing to get an extra unit of
food. Hence, the MRS is 6. Similarly, for subsequent exchanges, the MRS is 2
and 1 respectively. Therefore, MRS of X for Y is the amount of Y whose loss can
be compensated by a unit gain of X, keeping the satisfaction the same.
Interestingly, as Peter accumulates more units of food, the MRS starts falling –
meaning he is prepared to give up fewer units of clothing for food. There are two
reasons for this:
1. As Peter gets more units of food, his intensity of desire for additional units
of food decreases.
2. Most of the goods are imperfect substitutes for one another. If they could
substitute one another perfectly, then MRS would remain constant.
Properties of an Indifference Curve or IC
Here are the properties of an indifference curve:
An IC slopes downwards to the right
This slope signifies that when the quantity of one commodity in combination is
increased, the amount of the other commodity reduces. This is essential for the
level of satisfaction to remain the same on an indifference curve.
An IC is always convex to the origin
From our discussion above, we understand that as Peter substitutes clothing for
food, he is willing to part with less and less clothing. This is the diminishing
CONSUMER BEHAVIOUR
marginal rate of substitution. The rate gives a convex shape to the indifference
curve. However, there are two extreme scenarios:
1. Two commodities are perfect substitutes for each other – In this case, the
indifference curve is a straight line, where MRS is constant.
2. Two goods are perfect complementary goods – An example of such goods
would be gasoline and water in a car. In such cases, the IC will be L-shaped
and convex to the origin.
Indifference curves never intersect each other
Two ICs will never intersect each other. Also, they need not be parallel to each
other either. Look at the following diagram:
Fig 3 shows two ICs intersecting each other at point A. Since points A and B lie
on IC1, they give the same satisfaction level to an individual. Similarly, points A
and C give the same satisfaction level, as they lie on IC2. Therefore, we can imply
that B and C offer the same level of satisfaction, which is logically absurd. Hence,
no two ICs can touch or intersect each other.
A higher IC indicates a higher level of satisfaction as compared to a lower
IC
A higher IC means that a consumer prefers more goods than not.
An IC does not touch the axis
CONSUMER BEHAVIOUR
This is not possible because of our assumption that a consumer considers
different combinations of two commodities and wants both of them. If the curve
touches either of the axes, then it means that he is satisfied with only one
commodity and does not want the other, which is contrary to our assumption.
Budget Line
Since a higher indifference curve represents a higher level of satisfaction, a
consumer will try to reach the highest possible IC to maximize his satisfaction. In
order to do so, he has to buy more goods and has to work under the following two
constraints:
1. He has to pay the price for the goods and
2. He has limited income, restricting the availability of money for purchasing
these goods
As can be seen above, a budget line shows all possible combinations of two goods
that a consumer can buy within the funds available to him at the given prices of
the goods. All combinations that are within his reach lie on the budget line.
A point outside the line (point H) represents a combination beyond the financial
reach of the consumer. On the other hand, a point inside the line (point K)
represents under-spending by the consumer.
Do you also want to know Consumers Equilibrium?
CONSUMER BEHAVIOUR
Solved Question on Indifference Curve
Q: What are the assumptions underlying the indifference curve approach?
Ans: The assumptions are as follows,

The consumer is rational. Also, he possesses full information about all the
relevant aspects of the economic environment in which he lives.

The consumer can rank combination of goods based on the satisfaction they
yield. However, he can’t quantitatively express how much he prefers a
certain good over the other.

If a consumer prefers A over B and B over C, then he prefers A over C.
If a combination X has more commodities than the combination Y, then X is
preferred over Y.
curve indicates that a consumer is indifferent between the two and all points
give him the same utility.

https://economictimes.indiatimes.com › ... › Economy
A budget line shows the maximum consumption of a consumer at a given
income level. It shifts parallelly when there is a change in income but rotates
when the relative prices change.
A budget line is also called a budget constraint because it limits total
consumption possibility of a consumer. Total consumption in dollars at all
points on the budget line equals total income. If Product A is plotted on y-axis
and Product B on x-axis, the budge line touches y-axis at a point at which all
budget is spent on Product A and it touches x-axis at a point at which only
Product B is consumed. At any point in between these two extreme cases, a
combination of Product A and B are consumed.
A budget line can be represented using the following equation:
QyIPyPxPyQx
CONSUMER BEHAVIOUR
Where Qy represents the units of the good on y-axis, Px and Py are the prices of
the good on x-axis and y-axis respectively, and Px and Qx are the price and
quantity of the good on x-axis. Px/Py is actually the slope of the budget line.
Change in Income: Parallel Shift
If there is a change in income of a consumer but there is no change in relative
prices of the two goods, the budget line shifts parallelly i.e. the location of the
new budget line is parallel to the initial one.
In other words, if there is a change in income but no change in relative prices,
the ratio of the prices i.e. slope of the new budget line is the same as the slope
of the initial budget line but its location changes.
When there is an increase in income, a consumer can buy more of both goods
and this shows an outward i.e. rightward shift in the budget line. On the other
hand, when there is a decrease in income, the consumer’s consumption
possibility decreases, and the budget line shifts inwards.
Change in Relative Prices: Rotation
When there is a change in relative prices i.e. when price of only one good
increase or when the price of one good increases by a larger percentage than
the other, the budget line rotates i.e. it shifts but not parallelly.
The unparallel shift in budget line due to change in relative prices occurs
because an unequal change in price causes a change in the slope of the budget
line i.e. the ratio of prices.
The following example and graph illustrates the shift and rotation.
Example and Graph
Arya Stark is headed for Winterfell to meet Sansa and Jon Snow. She has 100
silver stag coins which she can spend on food for herself or supplies for her
horse. If a unit of food costs 10 stags and a unit of supplies costs 5 stages,
either of the following combinations are possible (let’s call this budget line X):
Combination
Food
Supplies
Total Spending
A
10.00
0.00
100
B
7.50
5.00
100
C
5.00
10.00
100
D
0.00
20.00
100
CONSUMER BEHAVIOUR
If she loses 50 stags, her new consumption possibility is tabulated below (let’s
call this budget line Y):
Combination
Food
Supplies
Total Spending
E
5.00
0.00
50
F
3.75
2.50
50
G
2.50
5.00
50
H
0.00
10.00
50
If her money remains 100 stags but the price of supplies decreases to 3 stags,
following combination of food and supplies are possible (let’s call this budget
line Z):
Combination
Food
Supplies
Total Spending
I
10.00
0.00
100
J
7.50
8.33
100
K
5.00
16.67
100
L
0.00
33.33
100
Let’s plot all these budget lines as follows:
CONSUMER BEHAVIOUR
You can see that due to change in income/wealth, the budget line shifts
downwards i.e. leftward from Budget Line X to Budget Line Y.
However, in response to a change in price of supplies, the budget line rotates
from Budget Line X to Budget Line Z.
EFFECT OF CHANGE IN CONSUMER’S INCOME
CONSUMER BEHAVIOUR