ALLIANCE UNIVERSITY
Name:- Nischith. Bashettiyavar
Class:- .B.B.A.LL.B (Hons)
Subject:- Economics
Date:- 07/09/2021
Topic:- Consumer Behaviour & Utility Analysis.
UTILITY:-
It is the power of commodity to satisfy the wants/ want satisfying power of a
commodity.
CHARACTERISTICS:-
> It refers to excepted satisfaction.
> It shouldn't be confused with usefulness.
> Subjective concept.
> No ethical or moral significance.
> It is physcological.
CARDINAL UTILTY:-
This utility is measurable & can be expressed quantitatively / cardinally.
EXAMPLE:- 1,2,3,4.
ORDINAL UTILITY:-
Ranking of preferences for commodities, it is qualitative.
INDIFFERENCE CURVE:-
It is a curve that represents all the combination of goods that give the same
satisfaction to the consumer.
ASSUMPTIONS:-
> Completeness.
> Non- satisfaction.
> Consistency/ Transitivity.
> Continunity/ Subtituability.
> Convexity.
INDIFFERENCE MAP:-
The collection of indifference curves is known as Indifference map.
PROPERTIES OF INDIFFERENCE CURVE:-
1}. THEY SLOPE NEGATIVELY/SLOPE DOWNWARDS FROM LEFT TO THE RIGHT:-
As such the indifference curve must slope downward to the right.
Thus it is proved that an indifference curve cannot slope upward to the
right, nor can it be horizontal/ vertical.
2}. THEY ARE CONVEX TO THE ORIGIN OF AXES:-
They are generally convex to the origin of the axes.
This property is dervied from the law of diminishing marginal rate of
substitution.
3}. EVERY INDIFFERENCE CURVE TO THE RIGHT REPRESENTS HIGHER LEVEL OF
SATISFACTION THAN THAT OF THE PROCEEDING ONE.
4}. INDIFFERENCE CURVES CAN NEITHER TOUCH NOR INTERSECT EACH OTHER, SO THAT
ONE INDIFFERENCE CURVE PASSES THROUGH ONLY ONE POINT ON AN INDIFFERENCE
MAP.
5}. INDIFFERENCE CURVES ARE NOT NECESSARILY PARALLEL TO EACH OTHER. ALTHOUGH,
THEY ARE FAILING & NEATIVELY INCLINED TO THE RIGHT.
6}. INDIFFERENCE CURVE WILL NOT TOUCH EITHER X-AXIS/ Y-AXIS.
7}. INDIFFERENCE CURVE CAN NOT BE POSITIVELY SLOPED.
CONSUMER BEHAVIOUR:-
1}. BUDGET LINE:-
It is a graphical representation of all possible combinations of two
goods, where the consumer can buy with the available money income.
FEATURES:-
> NEGATIVE SLOPE:-
If the line is downward, it shows a reverse correlation
between the two products.
> STRAIGHT LINE:-
It indicates a continuous market rate of exchange in
individual combinations.
>REAL INCOME LINE:-
It denotes the income & the spending size of customers.
> TANGENT TO INDIFFERENCE CURVE:-
It is the point when the indifference curve meets the budget
line. This point is known as the consumer's equilibrium.
ASSUMPTIONS:-
>Two commodities.
> Income of the customers.
> Market price.
> Expense is similar to income.
EQUATION OF BUDGET LINE:-
Px* Qx + Py* Qy.
ASSUMPTIONS OF CONSUMER EQUILIBRIUM:-
> Consumer's scale of preferences across different combinations of
two goods X & Y.
> Fixed money income.
> Price of goods.
> Homogenous divisible.
> Rationality.
EQUATION:-
MRS xy= MUx/MUy = Px/Py.
CONSUMER SURPLUS:-
According to Marshall,"excess of the price which a consumer would be
willing to pay rather than go without a thing over that which he actually
does pay, is the economic measure of this surplus satisfaction."
Consumer Surplus = What a consumer is willing to pay minus what he actually
pays.
Consumer's Surplus = Total utility - [Marginal utility] * [Multiply * No. of
units purchased].
Potential Price - Actual price = Consumer's Surplus.
ASSUMPTIONS:-
> Marginal utility of money is constant.
> No close substitutes available.
> Utility can be measured.
> Tastes & Incomes are same.
FORMULA:-
Tu = U1+U2+U3+U4 ... . .. .. +Un
MU= Additional utility.
TOTAL UTILITY:-
Overall satisfaction derived by a consumer from consumption of various units
of a good / service, at a certain point/ over a period, is known as total
utility. It is also known as "Full satiety".
TUn= Ux+Uy+Uz [OR] TU= Sigma MU.
MARGINAL UTILITY:-
The term 'Marginal' refers to small change, & utility means satisfaction.
Marginal utility is also known as Marginal saticity.
MU = TUn - TUn-1
LAW OF DIMINISHING MARGINAL UTILITY:-
The additional benefit which a person dervies from a given increase of his
stock of a thing diminishes with every increase in the stock that he already
has.
STATEMENT OF THE LAW:-
This law is based on the daily experience that when a person gets more of a
commodity, the desire to have still more diminshes.
LIMITATIONS:-
> Homogenous units.
> Continuous consumption.
> No change in taste & habits of the consumer.
> Standards units of commodity.
EXPECTATIONS FOR THE LAW OF DIMINISHING MARGINAL UTILITY:-
There are certain things on which the law of diminshing marginal utility does
not apply.
Desire for money, Desire of knowledge, Use of liqour/ wine & Collection of
rare objects.
i}. UNREALISTIC ASSUMPTIONS:-
Includes homogenity, continunity & constancy conditions. All these
assumptions are impossible to find at one.
ii}. INAPPLICABILITY TO CERTAIN GOODS:-
Implies that the law of diminshing marginal utility cannot be
applied to goods, such as television & refrigator. This is because the
consumption of these goods in not continuous in nature.
iii}. CONSTANT MARGINAL UTILITY OF MONEY:-
Assumes that Marginal utility of money remains constant, which is
unrealistic. There is also a gradual decrease in the Marginal utility
of money.
iv}. CHANGE IN OTHER PEOPLE'S STOCK:-
Implies that the utility of consumers is also dependent on what other
people have in their stock. Thus, this depends on the social needs.
v}. OTHER POSSESSIONS:
