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    Theory of Consumer Behavior

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    Khai VeChain

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    Theory of Consumer Behavior

    Uploaded by

    Khai VeChain
    293 views4 pages

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    © © All Rights Reserved

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    Copyright:

    © All Rights Reserved
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    Download as doc, pdf, or txt
    293 views4 pages

    Theory of Consumer Behavior

    Uploaded by

    Khai VeChain

    Copyright:

    © All Rights Reserved
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    of 4

    Theory of Consumer Behavior

    Objectives
    To discuss how consumer equilibrium is attained subject to
    budget constraint.

    Consumer Choice
    Given the prices of different commodities, consumers decide on
    the quantities of these commodities according to their paying
    capacity, and tastes and preferences.

    Consumers’ choices, tastes and preferences rests on the


    following assumptions:
     Completeness: A consumer would be able to state own
    preference or indifference between two distinct baskets of
    goods.
     Transitivity: An individual consumer’s preferences are
    always consistent.
     Non-satiation: A consumer is never satiated permanently.
    More is always wanted; if “some” is good, “more” of the good
    is better.

    Consumer Choice
     Commodities are desired because of their utility
     Utility is the attribute of a commodity to satisfy or satiate a
    consumer’s wants
     Utility is the satisfaction a consumer derives from
    consumption of a commodity

    Ordinal Utility Analysis


     A consumer is able to rank different combinations of the
    commodities in order of preference or indifference.
     Utility is not additive but comparative.
    Indifference Curve Analysis

    Indifference curve: Locus of points which show the different


    combinations of two commodities among which the consumer is
    indifferent, i.e. derives same utility.

    Indifference map: group of indifference curves


    Properties of Indifference Curves:
     Indifference curves are downward sloping - because of the
    assumption of non-satiation
     Higher indifference curve represents higher utility- utility at IC1
    is higher than utility at IC0.
     Indifference curves can never intersect
     Indifference curves are convex to the origin - because two
    goods cannot be perfect substitutes of each other

    IC1
    IC0
    Consumer’s Equilibrium
     Consumer would reach equilibrium point, i.e. highest level of
     satisfaction given all constraints at the highest indifference
    curve he/she can reach.
     Budget line of a consumer, consists of all possible
    combinations of the two commodities that the consumer can
    purchase with a limited budget:
     Budget constraint depends upon income of the consumer and
    prices of the commodities in the consumption basket.

    Conditions for consumer’s equilibrium:


     Consumer spends all income in buying the two commodities;
    hence point of equilibrium will always lie on the budget line.
     Point of equilibrium will always be on the highest possible
     indifference curve the consumer can reach with the given
    budget line.
     Consumer is able to maximize utility at a point where the
    budget line is tangent to an indifference curve
     This is the highest possible curve attainable by the consumer,
    subject to budget constraint.
     Budget line may shift either upwards or downwards due to any
    change in income of the consumer while price of the
    commodities remaining same
     Swivel at one point when price of one of the commodities
    changes, while income and price of other commodity remain
    same
    Good N

    E
    QN

    C4
    IC3
    IC2
    IC1
    0 Good M
    QM B

     Feasible set is the area OAB, and area beyond budget line AB
    is infeasible area; therefore IC4 is beyond reach of the
    consumer.
     Equilibrium is attained at point E where the AB is tangent to
    curve IC3 (highest attainable indifference curve).
     Point C and B are attainable but on lower indifference curve.
     Equilibrium quantities of commodities M and N are QM and
    QN.

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