4 .

Theory of Consumer Behavior

Dr. Pinki Shah

 • Utility Analysis
• Indifference Curve Analysis

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 consumer choice and behavior
• basic principles of consumer choice
and behavior.
• In explaining consumer behavior,
economists a century ago, developed
the notion of utility, with the help of
which they were able to derive demand
curve.
• Indifference Curve Analysis is
comparatively modern approach to
analyze consumer behavior.
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 Major Difference in Assumption

• Utility Analysis based on the assumption that

‘Utility is Measurable’ which is known as Cardinal
Approach.

• Indifference Curve Analysis based on the

assumption that ‘Utility can not be measured it
can only be ranked’ which is known as Ordinal
Approach.

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 Utility Analysis

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 Utility, Total utility, Marginal utility
Utility
Denotes satisfaction. The satisfaction consumers
receive from the items they acquire, activities
they engage in, or services they use, is called
utility.
Total utility
The total satisfaction enjoyed by a consumer from
consuming any given quantity of good/services
Marginal utility
The extra satisfaction received by consuming one
extra unit of a good/services
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 Law of diminishing marginal utility

The law states that the amount of extra or

MU declines as a consumer consumes
more and more of a good.

Which means…….
Total Utility increases up to a certain
point as you consume more of a good.
However, your total utility will grow at a
slower rate. Which means total Utility
increases but marginal utility decreases.
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 A Numerical Example:
(1)Quantity of a (2)Total Utility (3)Marginal
Good consumed (Q) (TU) Utility (MU)

0 0 0

1 4 4

2 7 3

3 9 2

4 10 1

5 10 0
6 9 -1
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 Graphical Representation

TU
10

MU
0
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 Some Points to Remember
• As consumer consumers more TU increases
and MU decreases
• TU increases up to a certain point
• When MU is zero TU is Maximum
• MU curve is downward sloping from left to
right
• Conceptually MU can be negative that
indicates dissatisfaction and then TU
decreases
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 Benefit Analysis
Utility is free from the unit of measurement. Benefit
Analysis place money value. So, defining
differently we have:
Total Benefit: Total amount of money a consumer is
ready to pay to consume certain quantity of
goods.
Marginal Benefit: Additional amount of money a
consumer is ready to pay to consume extra unit of
a goods.

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 Example
Suppose U are ready to pay Tk.10 to purchase first
unit of an Apple. So MB you can get from consuming
first unit of apple is equal to Tk.10. If actual price is
Tk.8, it will give you some additional benefit. Now if
for second unit you are ready to pay Tk.8 [as MU
decreases], then Price is equal to MB. So for the for
the third unit You will be ready to pay less than Tk.8
and ultimately You will not purchase the third unit.

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 Consumer Equilibrium under Benefit Analysis
• Consumers TU is maximum at a point where MB
=P; or
• Consumer consumes unto the point where MB =P

Net
Tk.10
Benefit of E
Consumer Tk.8 P

MB
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2 units 13
 Consumer Surplus
CS is the difference between what a consumer is
ready to pay and what actually pays.
For the given example Consumer Surplus is equal
to [18-16]=Tk.2; as the consumer is ready to pay
Tk.18 for first two units but he/she requires to
pay Tk.16 to obtain those units. Third unit would
not be purchased as the consumer is ready to pay
less than Tk.8 for the third unit. So,
Net Benefit is same as CS

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 Graphical Representation of Consumer
Surplus
Area of
Consumer
MB & Tk.10 Surplus
Price Tk.8

Consumer
Buy two
units
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1 2Dr.PinkiShah3 Units of Apple 15
 Indifference Curve Analysis

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 Indifference Curve
• Indifference Curve shows different combination of
two goods that provide equal satisfaction to a
consumer

• A consumer is indifferent at all points on a IC

curve

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 Indifference Curve

Good X

IC

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 Properties /Characteristics of
Indifference Curve
• IC curve is negatively sloped and Convex to the
origin
• Higher IC shows higher satisfaction and lower
IC shows lower satisfaction
• Two ICs can not intersect
• IC can not touch any axis
• It follows the Law of Diminishing Marginal Rate
of Substitution.

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 Law of DMRS
As a consumer shift from one point to
another he or she is ready to sacrifice
lesser and lesser unit of a good to
obtain extra units of another good.

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 Graphical Representation of Law

Good X A
15

B
8
C
5 D
3 IC

1 2 3 4
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Good21 Y
 Law of DMRS
Com Good X Good Y Ready to give up Y
for X
A 15 1 -

B 8 2 7

C 5 3 3

D 3 4 2
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 Equilibrium under IC Analysis
Equilibrium
Point for the
Good X Consumer where
Budget Line is
Tangent to IC

IC

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 Thank You

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