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8/7/2019 Consumer Behavior Final 2010
http://slidepdf.com/reader/full/consumer-behavior-final-2010 1/12
Consumer Behavior
Consumer Behavior
8/7/2019 Consumer Behavior Final 2010
http://slidepdf.com/reader/full/consumer-behavior-final-2010 2/12
Slide 2
Topics to be Discussed
Consumer Preferences
How and why people prefer one good to another
Budget Constraints
People have limited incomes.
Consumer Choice
What combination of goods will consumers buy to
maximize their satisfaction?
8/7/2019 Consumer Behavior Final 2010
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Cardinal Utility Approach
Slide 3
8/7/2019 Consumer Behavior Final 2010
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CONSUMER BEHAVIOR
Fundamental postulate of consumer behavior isthat consumer’s utility maximizing behavior
Can utility be measured? – matter of dispute
Marshall & his followers- utility is cardinallymeasurable
Modern economists rejected that – utility canonly be measured ordinally
8/7/2019 Consumer Behavior Final 2010
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CONSUMER BEHAVIOR
Three major approaches to analysis of consumer behavior:
Cardinal Utility Approach adopted by Neoclassical economists
Ordinal Utility Approach also known asIndifference Curve Analysis
Revealed Preference Approach of MiltonFriedman
8/7/2019 Consumer Behavior Final 2010
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Meaning of UtilityUtility
Power of a commodity to satisfy human wantsUtility is not absolute, it is relative to a person’s needsUtility derived depends on a person’s intensity of desire for
that commodity
Utility of some commodities depends on availability of complementary goodsUtility is ethically neutral- neutral between good & bad
AssumptionPeople allocate their income to maximize their satisfaction
or total utility
8/7/2019 Consumer Behavior Final 2010
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Measurability of Utility
Utility a psychological phenomenon
Can utility be measurable in absolute
terms? Classical & neo classical economists
believed that utility is quantitatively &
cardinally measurable
8/7/2019 Consumer Behavior Final 2010
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CONSUMER BEHAVIOR Their method of measuring utility:
Walras- used the term ‘util’ meaning ‘units of utility’
Classical economists used ‘util’ as measure of utility
Price a consumer is willing to pay equals the utility derived
Marginal utility of money remains constant
This method rejected by modern economists
Cardinal Utility Function: utility function describing the extent
to which one market basket is preferred to another.
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Total and Marginal utility
Total utility (TU) with reference to a single commodity may be defined asthe sum of the utility derived from all units consumed of the commodity
If consumer consumes 4 units of a commodity & derives U1, U2, U3, U4utils from them then
TU = U1 + U2 + U3 + U4
If he consumes n units then TUn = U1 + U2 + U3 + U4------ + Un
If number of commodities consumed & their units are greater than onethen
TU = TUx +TUy + TUz + ------ + TUn
Where x,y,z & n denote commodities
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Marginal Utility Marginal utility measures the additional satisfaction obtained from
consuming one additional unit of a good
MU is the utility derived from the marginal or last unit consumed
MU is the addition to the TU i.e. utility derived from consumption of oneadditional unit
or MU is the change in TU resulting from the change in consumption
MU = ∆ TU /∆ Q
MU may also be expressed as
MU = TUn – TU n-1
Slide 10
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8/7/2019 Consumer Behavior Final 2010
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The principle of diminishing marginal utility states that as
more and more of a good is consumed, the utilityderived by the consumer from the successive units goeson decreasing provided the consumption of all other goods remains constant
The additional benefit which a person derives from a
given increase of his stock of a thing diminishes withevery increase in the stock that he already has
Diminishing Marginal UtilityDiminishing Marginal Utility