PRINICIPLES OF CONSUMER BEHAVIOUR

CHOICE AND UTILITY THEORY:- (a)What is utility ? Utility means satisfaction. It is a scientific construction economist use to understand how rational consumers divide limited scare goods among different commodities. (b) Why different consumer’s choice different consumption possibilities i.e. someone choices burger, someone choice pastry?

MARGINAL UTILITY AND LAW OF DIMINISHING MARGINAL UTILITY:- The law of diminishing marginal utility states that, as the amount of a good consumed increases, the marginal utility of that good tends to diminish.

= = = = Burger Marginal U. Total Utility TU MU Burger MU=0 TU=23 Rule is consume as long as MU = 0

Relationship between MU and TU (i) Total utility is the sum of marginal utility. (ii) With incremental unit of consumption of the same goods marginal utility decrease but total utility increase at a decreasing rate.

EQUILIBRIUM CONDITION: EQUAL MARGINAL UTILITY PER TAKA FOR EVERY GOODS:- A consumer with a fixed income and facing given market prices of goods will achieve maximum satisfaction or utility when the marginal utility of the last dollar spent on each good is exactly the same as the marginal utility of the last taka spent on any other good.

What Is Indifference Curve ? The basic tool of Hicks-Allen ordinary analysis of demand is the indifference curve. INDIFFERENCE CURE (IC) represents all those combinations of goods which give same satisfaction to the consumer.

An Indifference curve schedule Good XGood YUtility level

Indifference Curve

Important Properties of IC IC slope downward to the right. ICs are convex to the origin. ICs cannot intersect each other. A higher level of IC represents a higher level of satisfaction than the lower indifference curve.

Why Demand Curves Slope Downward:- (i) Marginal utility approach (ii) Indifference curve approach Indifference analysis asks about the substitution effect and the income effect of a change in price. By looking at these, one can explain why the quantity demanded of a good declines as its price rises.

Why Demand Curves Slope Downward:- Substitution effect: Income effect: When the price of a good rises, consumers will tend to substitute other goods for the more expensive good in order to achieve desired satisfaction most cheaply. The Income effect signifies the impact of a price change on consumers’ real incomes. When a price rises and money incomes are fixed, consumers’ real incomes fall and they are likely to buy less of almost all goods.