CONSUMERS’ BEHAVIOUR AND DEMAND

CONSUMER A consumer is one who buys goods and services for satisfaction of wants.

UTILITY In economics, utility is a measure of the relative satisfaction from, or desirability of, consumption of various goods and services.

RELATION BETWEEN TU AND MU UNITS TU MU 1 10 2 18 8 3 24 6 4 28 5 30 7 -2 When MU is +ve, TU increases. When MU is 0, TU is maximum. When MU is –ve, TU decreases.

LAW OF DIMINISHING MU As more and more standard units of a commodity are continuously consumed, MU derived from every additional unit must decline. Also known as Fundamental Law of Satisfaction or Fundamental Psychological Law.

ASSUMPTIONS OF LAW OF DMU Standard unit of commodity is used. Homogenous commodity. Continuous consumption. Mental and social condition of the consumer must be normal.

EXAMPLE TO PROVE LAW OF DMU UNITS MU 1 10 2 8 3 6 4 5 7 -2

CONSUMER EQUILIBRIUM

ASSUMPTIONS OF CARDINAL APPROACH Consumer’s income is given. Market prices of commodity are given. Utility can be cardinally measured. Constant MU of money. Consumer is rational. Mental and social condition of the consumer must be normal.

CONDITION OF CARDINAL APPROACH (Single Commodity) Utility gained (UG) = Utility sacrificed (US) Or MUX = MUM or PX Where MUX = MU of X commodity MUM = MU of money PX = Price of X commodity

EXAMPLE OF CARDINAL APPROACH COMMODITY UNITS MUX PRICE (MUM) 1 50 10 2 30 3 20 4 5 6 -10

POINT OF SATIETY UNITS MUX Mum (PX) 1 10 2 8 3 6 4 5 7 -2 It is the situation in which the consumer does not pay any price for the commodity It exists when Mum(0) = MUX

CONDITION OF CARDINAL APPROACH (Two Commodities) MUX = MUY PX PY Where MUX = MU of X commodity MUY = MU of Y commodity PX = Price of X commodity PY = Price of Y commodity This is however, subject to the budget constraint that the money spent just equals the income. PXQX + PYQY = M

INDIFFERENCE CURVE (IC) It represents those combinations of 2 commodities that give the same satisfaction to the consumer.

MARGINAL RATE OF SUBSTITUTION (MRS) MRS of X commodity for Y commodity is defined as the no. of units of Y commodity that must be sacrificed in exchange for an extra unit of X commodity so that the consumer maintains the same level of satisfaction. Therefore, MRSXY = Loss of Y commodity = ΔY Loss of X commodity = ΔX

ASSUMPTIONS OF IC Consumer is interested in the purchase of 2 commodities. The 2 commodities are available in packed bundles. Each bundle contains different quantities of 2 commodities. Consumer can rank various bundles in order of importance to him.

EXAMPLE OF IC COMBINATIONS GRAPES (100 gms) ORANGES (Units) A 1 20 B 2 12 C 3 8 D 4 6

A set of ICs is known as an IM INDIFFERENCE MAP (IM) A set of ICs is known as an IM COMB. GRAPES (100 g) ORANGES (Units) G O A 1 20 2 3 B 12 4 C 8 5 D 6

EXAMPLE OF IM Oranges IC3 IC2 IC1 Grapes

FEATURES OF IC It is of convex shape to the origin It is downward sloping to the right IC never touches any axis, neither x nor y Higher the IC, higher level of satisfaction Two ICs never touch each other or intersect

THANK YOU Made by :- Saloni Dhingra Itisha Gupta In The Guidance of Mr. Premjeet Bhati