Cardinal Approch Consumer behavior Consumer behavior is the study of when, why, how, and where people do or do not

buy a product. It attempts to understand the buyer decision making process, both individually and in groups. Customer behavior study is based on consumer buying behavior, with the customer playing the three distinct roles of user, payer and buyer.

Utility: It is a mental satisfaction derived from the consumption of a good or services which cant be measured. In economics, utility is a measure of relative satisfaction. Given this measure, one may speak meaningfully of increasing or decreasing utility, and thereby explain economic behavior in terms of attempts to increase one's utility. Utility is often modeled to be affected by consumption of various goods and services, possession of wealth and spending of leisure time. Marginal utility: In economics, the marginal utility of a good or service is the utility gained (or lost) from an increase (or decrease) in the consumption of that good or service. Economists sometimes speak of a law of diminishing marginal utility, meaning that the first unit of consumption of a good or service yields more utility than the second and subsequent units. The concept of marginal utility played a crucial role in the marginal revolution of the late 19th century, and led to the replacement of the labor theory of value by neoclassical value theory in which the relative prices of goods and services are simultaneously determined by marginal rates of substitution in consumption and marginal rates of transformation in production, which are equal in economic equilibrium.

Good X 1 2 3 4

Good Y 20 35 45 55

MU 20 15 10 10

5 6 Assumptions: utility is measurable.

60 60

5 0

Marginal utility of money remains constant. Identical units should be consumed. Price remains constant. Fashion & taste of a consumer do not change. Continuous use of a good. Utility is derived from different goods is additive. Incase of more than one commodity utility should be equalized. Critisism: Utility is a psychological phenomenon which cant be measured. Example: In case of cardinal utility it is impossible to measure the level of satisfaction "quantitatively" when someone consumes/purchases an apple. Utility of money is not constant for every one. Price is not constant because of the market variation. Fashion & Taste of a consumer cant be constant.

Ordinal Approach Ordinal utility theory states that while the utility of a particular good or service cannot be measured using a numerical scale bearing economic meaning in and of itself, pairs of alternative bundles (combinations) of goods can be ordered such that one is considered by an individual to be worse than, equal to, or better than the other. This contrasts with cardinal utility theory, which generally treats utility as something whose numerical value is meaningful in its own right.

Indifference curve mappings: When a large number of bundles of goods are compared, the preferences of the individual can be seen. This information is usually put together on a graph called an indifference map. One of these is shown below:

Each indifference curve is a set of points, each representing a combination of quantities of two goods or services, all of which combinations the consumer is equally satisfied with. The further a curve is from the origin, the greater is the level of utility. The slope of the curve (the negative of the marginal rate of substitution of X for Y) at any point shows the rate at which the individual is willing to trade off good X against good Y maintaining the same level of utility. The curve is convex to the origin as shown assuming the consumer has a diminishing marginal rate of substitution. It can be shown that consumer analysis with indifference curves (an ordinal approach) gives the same results as that based on cardinal utility theory i.e., consumers will consume at the point where the marginal rate of substitution between any two goods equals the ratio of the prices of those goods (the equi-marginal principle). Combination 1 2 3 4 5 Good X (Apples) 15 11 8 6 5 Good Y (Mangos) 1 2 3 4 5