ALLIANCE UNIVERSITY

Name:- Nischith. Bashettiyavar

Class:- .B.B.A.LL.B (Hons)
Subject:- Economics
Date:- 07/09/2021
Topic:- Consumer Behaviour & Utility Analysis.

UTILITY:-

It is the power of commodity to satisfy the wants/ want satisfying power of a

commodity.

CHARACTERISTICS:-

> It refers to excepted satisfaction.

> It shouldn't be confused with usefulness.
> Subjective concept.
> No ethical or moral significance.
> It is physcological.

CARDINAL UTILTY:-

This utility is measurable & can be expressed quantitatively / cardinally.

EXAMPLE:- 1,2,3,4.

ORDINAL UTILITY:-

Ranking of preferences for commodities, it is qualitative.

INDIFFERENCE CURVE:-

It is a curve that represents all the combination of goods that give the same
satisfaction to the consumer.

ASSUMPTIONS:-

> Completeness.
> Non- satisfaction.
> Consistency/ Transitivity.
> Continunity/ Subtituability.
> Convexity.

INDIFFERENCE MAP:-

The collection of indifference curves is known as Indifference map.

PROPERTIES OF INDIFFERENCE CURVE:-

1}. THEY SLOPE NEGATIVELY/SLOPE DOWNWARDS FROM LEFT TO THE RIGHT:-

As such the indifference curve must slope downward to the right.

Thus it is proved that an indifference curve cannot slope upward to the
right, nor can it be horizontal/ vertical.

2}. THEY ARE CONVEX TO THE ORIGIN OF AXES:-

 They are generally convex to the origin of the axes.
This property is dervied from the law of diminishing marginal rate of
substitution.

3}. EVERY INDIFFERENCE CURVE TO THE RIGHT REPRESENTS HIGHER LEVEL OF

SATISFACTION THAN THAT OF THE PROCEEDING ONE.

4}. INDIFFERENCE CURVES CAN NEITHER TOUCH NOR INTERSECT EACH OTHER, SO THAT
ONE INDIFFERENCE CURVE PASSES THROUGH ONLY ONE POINT ON AN INDIFFERENCE
MAP.

5}. INDIFFERENCE CURVES ARE NOT NECESSARILY PARALLEL TO EACH OTHER. ALTHOUGH,
THEY ARE FAILING & NEATIVELY INCLINED TO THE RIGHT.

6}. INDIFFERENCE CURVE WILL NOT TOUCH EITHER X-AXIS/ Y-AXIS.

7}. INDIFFERENCE CURVE CAN NOT BE POSITIVELY SLOPED.

CONSUMER BEHAVIOUR:-

1}. BUDGET LINE:-

It is a graphical representation of all possible combinations of two
goods, where the consumer can buy with the available money income.

FEATURES:-

> NEGATIVE SLOPE:-

If the line is downward, it shows a reverse correlation
between the two products.

> STRAIGHT LINE:-

It indicates a continuous market rate of exchange in
individual combinations.

>REAL INCOME LINE:-

It denotes the income & the spending size of customers.

> TANGENT TO INDIFFERENCE CURVE:-

It is the point when the indifference curve meets the budget
line. This point is known as the consumer's equilibrium.

ASSUMPTIONS:-

>Two commodities.
> Income of the customers.
> Market price.
> Expense is similar to income.

EQUATION OF BUDGET LINE:-

Px* Qx + Py* Qy.

ASSUMPTIONS OF CONSUMER EQUILIBRIUM:-

> Consumer's scale of preferences across different combinations of

two goods X & Y.
> Fixed money income.
> Price of goods.
 > Homogenous divisible.
> Rationality.

EQUATION:-

MRS xy= MUx/MUy = Px/Py.

CONSUMER SURPLUS:-

According to Marshall,"excess of the price which a consumer would be

willing to pay rather than go without a thing over that which he actually
does pay, is the economic measure of this surplus satisfaction."

Consumer Surplus = What a consumer is willing to pay minus what he actually

pays.

Consumer's Surplus = Total utility - [Marginal utility] * [Multiply * No. of

units purchased].

Potential Price - Actual price = Consumer's Surplus.

ASSUMPTIONS:-

> Marginal utility of money is constant.

> No close substitutes available.
> Utility can be measured.
> Tastes & Incomes are same.

FORMULA:-

Tu = U1+U2+U3+U4 ... . .. .. +Un

MU= Additional utility.

TOTAL UTILITY:-

Overall satisfaction derived by a consumer from consumption of various units

of a good / service, at a certain point/ over a period, is known as total
utility. It is also known as "Full satiety".

TUn= Ux+Uy+Uz [OR] TU= Sigma MU.

MARGINAL UTILITY:-

The term 'Marginal' refers to small change, & utility means satisfaction.

Marginal utility is also known as Marginal saticity.

MU = TUn - TUn-1

LAW OF DIMINISHING MARGINAL UTILITY:-

The additional benefit which a person dervies from a given increase of his
stock of a thing diminishes with every increase in the stock that he already
has.

STATEMENT OF THE LAW:-

This law is based on the daily experience that when a person gets more of a
commodity, the desire to have still more diminshes.
LIMITATIONS:-

> Homogenous units.

> Continuous consumption.
> No change in taste & habits of the consumer.
> Standards units of commodity.

EXPECTATIONS FOR THE LAW OF DIMINISHING MARGINAL UTILITY:-

There are certain things on which the law of diminshing marginal utility does
not apply.

Desire for money, Desire of knowledge, Use of liqour/ wine & Collection of
rare objects.

i}. UNREALISTIC ASSUMPTIONS:-

Includes homogenity, continunity & constancy conditions. All these

assumptions are impossible to find at one.

ii}. INAPPLICABILITY TO CERTAIN GOODS:-

Implies that the law of diminshing marginal utility cannot be

applied to goods, such as television & refrigator. This is because the
consumption of these goods in not continuous in nature.

iii}. CONSTANT MARGINAL UTILITY OF MONEY:-

Assumes that Marginal utility of money remains constant, which is

unrealistic. There is also a gradual decrease in the Marginal utility
of money.

iv}. CHANGE IN OTHER PEOPLE'S STOCK:-

Implies that the utility of consumers is also dependent on what other

people have in their stock. Thus, this depends on the social needs.

v}. OTHER POSSESSIONS: