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Theory of Consumer Behaviour

Consumer behaviour is the study of how individual customers, groups or organizations select, buy, use, and dispose ideas, goods, and services to satisfy their needs and wants. It refers to the actions of the consumers in the marketplace and the underlying motives for those actions.  

Utility is want satisfying power of a commodity. There are two types:- 

• Total utility is the total satisfaction derived from consumption of given quantity of a commodity at a given time. In other words, It is the sum total of marginal utility. 

• Marginal Utility is the change in total utility resulting from the consumption of an additional unit of the commodity. In other words, it is the utility derived from each additional unit. 

Law of Diminishing Marginal Utility: As consumer consumes more and more units of commodity the Marginal utility derived from each successive units go on declining. This is the basis of law of demand.  

Consumer’s Bundle is a quantitative combination of two goods which can be purchased by a consumer from his given income  

Budget line always slope downwards so that consumer can increase the consumption ofGood 1 
only by decreasing the consumption ofGood 2. If consumers desire to have one additional unit of 
Good 1, then they can only have that additional unit if they manage to give up some quantity of 
other good. Consuners have limited income. They have to decide whether to spend on either 
Good 1 or Good 2 
Change in Budget Line: There can be parallel shift (leftwards or rightwards) due to 
change in income of the consumer and change in price of goods. A rise in income of the 
consumer shifts the budget line rightwards and vice-versa. In case of change in price of 
one good, there will be rotation in the budget line. Fall in price cause outward rotation 
due to rise in purchasing power and vice-versa. 
Effect in 
on
Marginal Rate of Substitution (MRS) :lt is the rate at which a consumer is willing to substitute 
(good Y/ good X) one good to obtain one more unit of the other good. Generally, It is the slope 
of indifference culve 
MRS is never constant, it varies over the IC. As we move along Indifference Curve, MRS 
falls also called Diminishing Marginal rate of substitution 
Indifference Curve: It is a culve showing different 
combination of two goods, each combinations offering the same 
level of satisfaction to the consumer. 
B urqers 7 
Characteristics of IC 
1. Indifference curves are negatively sloped (i.e. slopes downward from left to ri@lt) 
2. Indifference curves are convex to the point of origin. It is due to diminishing marginal rate of 
substitution. 
3. Higher indifference curve represents higher level of satisfaction.
Quantity Demanded: It is that quantity which a consumer is able and is willing to buy at palticular 
price and in a given period of time. 
Determinants of Demand: 
a). Price of Good 
b). Income of Consumers 
c). Taste & Preference of Consumer 
Change of Demand : 
a) Change in quantity demanded or Movement along Demand curve 
of 
pward
b) Change in Demand or Shift in Demand 
in 
Market Demand: It is the total quantity of the commodity demanded in the market by all consumers 
at different prices at a point of time. 
Demand Function: It is the functional relationship between the demand for a commodity and factors 
affecting demand. 
Law of demand: The law states that when all other thing remains constant then there is inverse 
relationship between price of the commodity and quantity demanded of it. That is, higher the price, 
lower the demand and lower the price, Ili@ler the demand. 
Change in Demand: When demand changes due to change in any one of its detenninants other than 
the price. 
Change in Quantity Demanded: Wien demand changes due to change in its own price keeping all 
other factors constant.
Demand curve and its slope: 
in price 
slope Of curve 
Change in qty.dd. 
qty.
Price Elasticity of Demand: Price Elasticity of Demand is a measurement of change in quantity 
demanded in response to a change in price of the commodity 
Methods of Measurement of Price 
Elasticity of 
Percentage Change in Quantity dernand of a com 
Percentage in Price 
Total Expenditure Method : It measures price elasticity of demand on the basis of change in total 
expenditure incurred on the commodity by a household due to change in its price. 
There are three conditions : 
1. EFI When due to rise or fall in price ofagood, total expenditure remains unchanged. 
2. EOI Wien due to fall in price, total expenditure goes up and due to rise in price, total 
expenditure goes down. 
3. Ed<l when due to fall in price, total expenditure goes down and due to rise in price, total 
expenditure goes up.

Factors influencing Price elasticity of Demand 

(a) Nature of the Commodity. 

(b) Availability of Substitute goods. 

(c) Income level of the consumer. 

(d) Price level of the commodity. 

(e) Time Period. 

(f) Different use of the commodity. 

(g) Behaviour of the consumer. 

(h) Postponement of consumption  

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