# CONSUMER BEHAVIOUR. Lecture delivered at the MDKG College 1 st Semester (Major)

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1 Lecture delivered at the MDKG College 1 st Semester (Major) Ashwini Machey Assistant Professor Department of Economics MDKG College, Dibrugarh, Assam

2 Concept of Consumer Behaviour: The theory of consumer behaviour refers how consumers allocate incomes among different goods and services to maximize their satisfaction or well being. Basics of consumer behaviour: Consumer Preferences: Consumers use to compare different groups of items available for purchase and one group of items is preferred to another group, or the consumer is indifferent between the two groups. Budget Constraints: Consumers have limited income which restricts the quantities of goods and services they can buy. Consumer Choices: Given consumer s preferences and limited income, consumers choose to buy combinations of goods that maximize their satisfaction.

3 Assumptions about Consumer Preferences: Completeness: Preferences are assumed to be complete. Transitivity: Preference are transitive. Theories of Consumer Behaviour: => Cardinal Utility Theory (or Approach) or Marshllian Theory of Consumer Behaviour => Indifference Curve Theory or Indifference Preference Approach or Ordinal Utility Theory

4 Cardinal Utility Theory: The cardinal utility theory says that utility is measurable just as prices and quantities are. That is, we can assign a number of utils to each commodity. For instance, An Orange = 5 utils An Apple = 4 utils

5 Assumptions of Cardinal Utility Theory: The consumer is thought to be rational in that he is deemed to make deliberate calculations and consistent choices, that if he prefers A to B and B to C then he does not prefer C to A. The utility analysis is based on the cardinal concept which assumes that utility is measurable and additive or subtractive. Thus utility is a measurable and quantifiable entity. Marginal utility of money remains constant. If marginal utility of money remains constant utility of any commodity can be measured in terms of money. The consumer knows the exact prices of various commodities and their utilities are not influence by variations in their prices.

6 Ordinal Utility Theory: Indifference curve analysis measures utility in ordinal terms. The ordinal utility says that utility is not measurable like prices and quantities. But one can order or rank the utilities from different goods. Indifference curve analysis is an improvement over the utility analysis. It is given by Hicks and RGD Allen. As an improvement IC analysis uses ordinal measure of utility in place of cardinal measure. For instance, we can say whether the utility of an orange is less than, equal to, or greater than the utility of an apple. Also we can rank like 1 st, 2 nd, 3 rd etc.

7 Ordinal Utility Theory: Indifference Schedule X Y

8 Indifference Curve: CONSUMER BEHAVIOUR Indifference curve is a locus of various combination of two goods and one indifference curve gives equal level of satisfaction at any point. In other words an indifference curve is a graph showing different bundles of goods between which a consumer is indifferent. Higher indifference curve provide higher level of satisfaction and lower indifference curve gives lower level of satisfaction.

9 Consumer s equilibrium through Indifference curve Analysis: Consumer s equilibrium is a situation when the consumer attains maximum satisfaction with the given limitations of money income and prices. The point of equilibrium is such that he does not want a change from it. Consumer equilibrium is based on the following assumptions: 1. The prices of two goods are given and constant. 2. The money income of the consumer remains constant. 3. The tastes and preferences of the consumer remain same. 4. The consumer is rational, i.e. the consumer prefers larger satisfaction to ` smaller satisfactions. 5. The theory follows all the foundations of indifference curves, like convexity, transitivity, ordinality and scale of preference.

10 Consumer equilibrium is based on the following assumptions: 1. The prices of two goods are given and constant. 2. The money income of the consumer remains constant. 3. The tastes and preferences of the consumer remain same. 4. The consumer is rational, i.e. the consumer prefers larger satisfaction to ` smaller satisfactions. 5. The theory follows all the foundations of indifference curves, like convexity, transitivity, ordinality and scale of preference.

11 IC curve and Budget Line : CONSUMER BEHAVIOUR

12 Consumer s Equilibrium : CONSUMER BEHAVIOUR

13 Thanks