CONSUMER BEHAVIOUR - PDF Ffree
CONSUMER BEHAVIOUR - PDF Ffree
CONSUMER BEHAVIOUR - PDF Ffree
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1. Consumer is a person who takes decisions about what to consume and how much to consume for the
satisfaction of his wants.
2. Utility: The want satisfying power of a commodity is known as utility. The units of measurement of utility is
called Utility.
3. Marginal Utility: The additional or extra utility received from consuming each additional unit of the
commodity is called marginal utility.
MU = TUn - TUn - 1
4. Total Utility: Total utility is the sum of marginal utilities. The more units of a commodity, a consumer
consumes per unit of time, the greater is the total utility he obtains.
5. Measurement of Utility: Utility derived from the consumption of any commodity can be measured in
cardinal number such as 1, 2, 3, 4, 5, etc. According to Hicks, utility can only be measured in ordinal numbers
such as 1st , 2nd , 3rd , 4th , 5th etc.
6. Relationship between Total Utility and Marginal Utility:
(i) When MU falls, but remains positive, TU increases.
(ii) When MU is zero, TU is maximum and constant
(iii) When MU is negative, TU declines.
7. Law of Diminishing Marginal Utility: According to this law, as the amount consumed of a commodity
increases, the utility derived by the consumer from the additional units (i.e. ,_marginal utility) goes on
diminishing,,
8. Assumptions of the Low of DMU:
(i) A consumer should be a rational, i,e. he should be willing to maximize his satisfaction.
(ii) The goods should be homogeneous,' i.e., it 'should be same in every aspect, e.g., colour, taste, size, etc,.
(iii) The unit of the goods must be standard, e.g., a glass of water not a cup of water.
(iv) There should be no change in the taste and preferences of the consumer during the process of consumption.
(v) Utility can be measured ,by absolute numbers. , , ,, n
(vi) There must be a continuity in consumption and if break is needed it should be very short.
9. Reasons behind Operation of Law:
(i) Intensity of Desire: According to this when more and more units of a commodity are consumed the
consumer intensity of desire to consume that commodity decreases and the utility derived from additional unit
also decreases
(ii) Priority to Important Use: If there are many uses of the commodity, the most urgent requirement will be
fulfilled first followed by next important use and so on, e.g. , electricity. _
10 Exceptions to the Law:
Law of DMU is not applicable in the following cases:
(i) Hobbies (ii) Goods of display
(iii) Intoxicants (iv) Money
(v) Good books poetry (vi) Rare goods, etc.
11. Marginal Utility of Money: It refers to worth of a unit of money to a consumer. It implies the utility that a
consumer expects to obtain from a standard basket of goods that he can purchase by spending a unit of money.
12. Consumers Equilibrium: Utility approach under one commodity case:
Consumer's equilibrium is attained when the marginal utility in terms of money is equal to the price.
MUx = Px. Two commodities case : MUx /Px = MUy/Py
13. Law of Equi-marginal: The law of equi-marginal utility states; if a person has a thing which he can put to
several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all.
14. Limitations of the Law of Equi-marginal Utility:
(i) Utility cannot be measured. Thus, it is very difficult for the consumer to know the utility derived from a
commodity.
(ii) Habits and custom play a very important role for consumers. Thus, their decisions regarding buying
commodity are mainly governed by habits and customs instead of utility.
(iii) Many consumers are ignorant regarding equilibrium positions and utility derived from the commodities.
(iv) The demand for expensive and indivisible goods cannot be adjusted easily. Thus, it is not possible to equate
the MU on it.
(v) Marginal utility of money is not constant. As the consumer spends more and more of his income in buying
more and more units of the commodity the marginal utility of money income rises.
15. Relationship between the Marginal Utility Curve and the Demand Curve: The marginal utility curve itself
is the demand curve. The demand curve is downward sloping because of the law of diminishing marginal
utility.
16. Indifference Curve Approach: This approach was given by Prof. Hicks and Allen. According to this
approach, utility is ordinal i.e., utility cannot be measured in cardinal numbers such as 1, 2, 3, etc. It can be
measured in ordinal numbers such as 1st, 2nd, 3rd, etc. '
17. Indifference Curve: It shows different combinations of two goods that provide the same level of utility or
satisfaction to the consumer. The consumer preferences can be represented by a family of indifference ,curves
known as indifference map.
18. Properties of Indifference Curve:
(i) An indifference curve always slopes downward from left to right.
(ii) Indifference curve is convex to the origin.
(iii) Higher indifference curve gives higher level of satisfaction.
(iv) Two indifference curves never intersect each other.
19. Marginal Rate of Substitution: It is the rate at which consumer sacrifices one commodity to consume some
units of the other commodity to keep the level of satisfaction same. It can be calculated as : MRS = Change in
X/Change in Y.
20. Budget Line: It shows different possible combinations of goods which a consumer can buy with his given
income and price of goods. The consumer cannot afford to buy any combination of two goods that lies outside
his budget line.
21. Budget Set: All combinations of two goods that lie on or below the budget line constitute the budget set.
22. Condit ions of Consumer's Equilibrium: Indifference Curve Approach:
(i) Budget line should be tangent to the indifference curve.
(ii) MRS xy= Px/ Py
(iii) MRS should be diminishing at the point of equilibrium.
1 MARK QUESTIONS
A. FILL IN THE BLANKS
1. Want satisfying power is termed as ____
2- At 'point of satiety' marginal utility is ____
3. For a consumer to be in equilibrium, consuming one commodity, MUx = ____
4- When total utility is maximum, marginal utility is ____
5. When marginal utility becomes negative, TU ____
6. When only one unit of a commodity is consumed, MU = ___
7. If MUx = 80 utils and MUy = 60 utils, the price of X at equilibrium is Rs 4 then price of Y will be ___
8. At 'point of satiety' marginal utility curve intersects ____ axis.
9. Slope of budget line, in case of X and Y is estimated by ___
10. For consumer to be in equilibrium MRSxy = ___
11. Indifference curve is ____ sloping and ____ to the origin.
12. Indifference curve is convex to the origin due to ___
13. At equilibrium, slope of budget line = ___
14. The consumer is in equilibrium consuming two goods X and Y. The price of X falls, consumer will buy less
of ____.
15. A set of indifference curves is called ___
16. Budget line can shift due to change in ____ or ___
17. Two indifference curves ____ intersect.
18. Indifference curve is convex to the origin because of ___
19. In case of equi-marginal utility, the condition of equilibrium= ___
20. When MU can be measured, added or subtracted is known as ___
21. When MU of two goods can be compared, it is known as ___
22. Indifference curve is also known as ___
23. Price line is alternatively known as ___
24. Monotonic preference refers to when a consumer gets ___
25. If MRS is rising throughout, the indifference curve will be ___
ANSWERS
1. Utility 2. Zero 3. Px 4. Zero
5. Starts falling 6. TU 7. 3 8. X-axis
9. Px/Py 10. Px/Py 11. Downward sloping, 12. DMRS
convex
13. Slope of the 14. Commodity Y 15. Indifference map 16. Income, price of
indifference curve goods
17. Never 18. DMRS 19. MUx / Px = MUy / 20. Cardinal utility
Py=MUM
21. Ordinal Utility 22. Iso-utility curve 23. Budget line 24. More of one
commodity but no
less of the other
commodity
25. Concave to the origin
B. TRUE OR FALSE
1. Any consumption beyond the point of satiety leads to disutility.
Ans. [True] Point of satiety shows the stage of maximum satisfaction. Any consumption beyond this point leads
to disutility as MU becomes negative.
2. Different points on an indifference curve represent different levels of satisfaction.
Ans. [False] All points on the indifference curve show same level of satisfaction.
3. An indifference curve is convex to the origin because of DMU.
Ans. [False] Indifference curve is convex to the origin because of the law of diminishing marginal rate of
substitution.
4. Marginal rate of substitution indicates the slope of budget line.
Ans. [False] Price ratio measures the slope of budget line.
5. Marginal rate of substitution remains same along the indifference curve.
Ans. [False] It diminishes along the indifference curve.
6. The bundles of budget set lie either on or below the budget line.
Ans. [True] Budget set include all the possible bundles which cost less than or equal to consumer's money
income. Bundles costing less than income lie below the budget line and bundles costing equal to income lie on
the budget line.
7. Two indifference curves intersect each other when they represent same level of satisfaction.
Ans. [False] Two indifference curves never represent same level of satisfaction. So, they can never intersect
each other.
8. Total utility is minimum when marginal utility is zero.
Ans. [False] Total utility is maximum when marginal utility is zero.
9. When the marginal utility starts falling, total utility also starts decreasing.
Ans. [False] Total utility starts decreasing only when marginal utility is negative.
1 o. Marginal utility can never be negative.
Ans. [False] When consumption increases beyond the point of satiety the marginal utility becomes negative.
11 . A budget set is the collection of all bundles of goods that a consumer wants to buy.
Ans. [False] Budget set consists of all those bundles of two goods, which a consumer can afford within his given
income at given prices.
12. A consumer is in equilibrium when he earns maximum profit.
Ans. [False] Because a consumer is in equilibrium when he gets maximum satisfaction from purchase of a
goods.
13. A consumer is in equilibrium where indifference curve is equal to budget line.
Ans. [False] Because a consumer is in equilibrium where budget line is tangent to indifference curve.
14. Marginal utility of analysis of consumer equilibrium assumes that utility can be expressed in cardinal
numbers.
Ans. [True] MU approach assumes that consumer can express utility in terms of cardinal numbers like 1,2,3,
etc.
15. According to cardinal approach consumer is at equilibrium where MUx > Px·
Ans. [False] Because consumer is at equilibrium where MUx = Px,
ANSWERS
l. (c) 2. (b) 3. (b) 4. (c) 5. (b) 6. (c) 7. (a) 8. (d) 9.(b) 10. (c)
11. (c) 12. (a) 13. (b) 14. (b) 15. (a) 16. (b) 17. (a) 18. (d) 19.(c) 11. (c)
21. (c) 22. (a) 23. (b) 24. (b) 25. (c) 26. (b) 27. (c) 28. (b) 29.(d)
D. ASSERTION-REASON TYPE
Read the following statements-Assertion (A) and Reason (R), and select the correct alternative in each case:
(a) (A) is true, but (R) is false.
(b) (A) is false, but (R) is true.
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(d) Both (Al and (R) are true but (R) is not the correct explanation of (A).
1. Assertion (A) :Indifference curve is convex to the origin
Reason (R) : Diminishing marginal rate of substitution.
2. Assertion (A) : Additional utility derived from the consumption of one more unit of commodity is always
diminishing.
Reason (R): It happens because of decreasing intensity of desire.
3. Assertion (A): MU can never be nigative.
Reason (R): MU can become negative when TU falls with increase in consumption of a commodity.
4. Assertion (A) : If a consumer consumes a goods with a time lag then the law of DMU does not hold true.
Reason (R): Human wants are unlimited, as soon as one want gets satisfied another want arises .
5. Assertion (A) : The slope of the budget line is represented by the price ratio.
Reason (R) : Budget line slopes downwards as more of one goods can be bought by decreasing some units of
the other goods.
6, Assertion (A) : Consumer's utility is the point of 'satiety' where he attains maximum gain with given resources.
Reason (R):A rational consumer always prefers the consumption of more units of goods as compared to Jess
units.
7. Assertion (A) : A consumer attains equilibrium at a point where the budget line is tangent to the indifference
curve
Reason (R): At the point of tangency, indifference curve is convex to the origin.
ANSWERS
2 MARK QUESTIONS
Let us assume that the prices of goods X and Y are Rs 2 and Rs 3 respectively and the consumer has Rs 24 to spend
on these two commodities. In order to maximize his utility, consumer will equate the marginal utility of the last
rupee spent on these two commodities. In other words, he will equate MUx/Px with MUy /Py while spending his
given income on the two commodities.
As it is clear from the above table that MUx/Px is equal to 5 utils when the consumer purchases 6 units of commodity
X and MUy /Py is equal to 5 utils when he purchases 4 units of commodity Y. Therefore, consumer will be in
equilibrium when he is buying 6 units of X and 4 units of Y and will be spending Rs 24 (Rs 2 x 6 + 3 x 4) in all. This js
the equilibrium position where consumer maximizes his utility.
Units Px MUx
1 50 80
2 50 70
3 50 60
4 50 50
5 50 40
6 50 30
In the above table, it shows that if Px = Rs 50, then the consumer will buy 4 units of goods X. If he purchases less than
4 units, say 3 units, then the MU he derives from 3 units is worth Rs 60 and the price he pay is Rs 50. Since, MUx >
Px, he purchases more. In other words, since price is less he purchases more which is the logical basis of the law of
demand.
A consumer will not buy more than 4 units of X this is because if he purchases 5 units of X
then the price he pays will be more than the MU he derives which is worth Rs 40. Hence, in
order to maximise utility a consumer will buy that commodity of goods where MU of the goods
X is equal to the price which he has to pay for it. Thus, consumer's equilibrium = MUx = Px,
The consumer's equilibrium can be explained graphically also in the graph given aside. The
consumer will be at equilibrium at point E where MUx = Px, The equilibrium price is given
at OP and equilibrium quantity is given as OQ.
CASE 2
We buy many goods and services to satisfy our wants. Using goods and services to satisfy wants is called
consumption and the person who buys goods and services is called consumer. When a consumer purchases any
goods or service, his main objective is to maximise the satisfaction. The way consumer maximises his satisfaction
from spending his income on various goods and services is the subject matter of consumer behaviour. There are
two approaches to study the consumer behaviour.
Answer the following questions based on the above paragraph:
1. Define the term 'consumption'.
2. Name two terms used to measure the consumer's equilibrium.
3. What do you mean by consumer equilibrium?
Ans. 1. Act of using goods and services to satisfy human wants is known as consumption.
2. Cardinal approach and ordinal approach.
3. Consumer's equilibrium take place at a point where he gets the maximum satisfaction
CASE 3
Utility is known as want satisfying power of a commodity. Total utility is the total satisfaction derived from
consuming given number of units of a particular commodity. Total utility increases at a diminishing rate. Marginal
utility on the other hand is the additional utility derived from consuming one more unit of a commodity. Marginal
utility is always diminishing, it goes into negative also. When marginal utility becomes zero, total utility is
maximum and constant but when marginal utility goes into negative, total utilities starts falling. Law of DMU is
based on the nature of MU only.
Answer the following questions based on the above paragraph:
1. Draw the graph of TU and MU.
2. What do we call the point where TU is maximum and MU is zero?
3. Explain the reason behind diminishing marginal utility.
4. Wis increasing at a diminishing rate'. What do you mean by 'rate' in this sentence?
UNITS 1 2 3 4 5 6
MU 9 6 4 2 0 -2
UNITS 1 2 3 4 5
TU 16 40
MU 12 8 6
3. Suppose, the price of the commodity 'X' is given as 8 and the MU for 4 units is given below. Tell how many units
consumer should consume to reach at equilibrium and why? (3 Marks)
UNITS 1 2 3 4
MUx 12 10 8 6
4. A marginal utility schedule of a person is given below. Discuss the law underlying the given (6 Marks)
schedule
PENS (Units) 1 2 3 4 5
MARGINAL 25 20 15 10 5
UTILITY (Utils)
5. What is meant by consumer's equilibrium? State its condition in case of one and more than (4 Marks)
one commodity.
6. What do you mean by point of satiety? (2 Marks)
7. The following table shows the marginal utility derived from the purchase of a bag. The price of the bag is Rs 400.
With the help of a diagram explain consumer's equilibrium when MUx = Px. (4 Marks)
UNITS 1 2 3 4 5
MU 600 500 400 300 200
8. Give the assumptions of law of DMU. Is there any exception to the law of DMU? (6 Marks)
9. A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The
consumer's income is Rs 20. (6 Marks)
(i) Make a budget schedule for that consumer.
(ii) Draw a budget line on the basis of the schedule.
(iii) What is the slope of the budget line?
(iv) What happens to the budget line if consumer's income increases to Rs 50?
10. Explain why a consumer would be in equilibrium where the slope of the budget line is equal to the slope of the
indifference curve. (6 Marks)
11 . (i) Study the schedule given below and identify how much of commodity A and commodity B will a utility
maximising consumer buy. (6 Marks)