THE THEORY OF

CONSUMER BEHAVIOR
INTRODUCTION:
The purpose of the theory of demand is to determine the
various factors that affect demand. To have a recap, the
following are the determinants of demand:

1.Price of commodity
2.Prices of substitute or complimentary goods
3.Income
4.Tastes and preferences
5.Population
OBSERVATION:

 The traditional theory of demand emphasizes on consumer’s

demand for durable and non-durable goods.
 It does not deal with investment goods.
 It is only a fraction of the total demand in the economy as a
whole.
 The market demand is assumed to be the summation of demands
of individuals consumers.
 If a consumer gets more utilities from commodity, he would be
willing to pay higher price and vice-versa.
DEFFINITION OF TERMS:

Utility – refers to wants satisfying power of commodity which

varies from each individual.

Total Utility – refers to the sum utility derived from different

units of a commodity consumed by a consumer.

Marginal Utility – refers to the additional utility (satisfaction)

derived from additional unit of a commodity.
MARGINAL UTILITY ANALYSIS:

 Formulated by Alfred Marshall

 It seeks to explain how a consumer spends his

income on different goods and services so as to
attain maximum satisfaction.
THE LAW OF DIMINISHING MARGINAL UTILITY:

 It is based on human wants.

 It was first developed by German economist H.H Gossen

which is known as “Gossen’s First Law”.

 It was popularized later by Prof. Alfred Marshall who

said that: “the additional benefit which a person derives
from a given increase of his stock of a thing diminishes
with every increase in the stock that he already has.”
ASSUMPTIONS:

1.Taste and preferences of the customer remain

constant.
2.Income of the customer also remain constant.
3.Units of the goods are identical or similar.
4.The process of consumption is continuous.
5.Units of the goods are not very small in size.
LIMITATIONS:

1.Different unit consumed must be identical and the habit,

taste, income and treatment of the consumer also remain
unchanged.
2.Different unit consumed should be standard units.
3.Continuous consumption. i.e. no gap between two
consumptions of one unit and another unit.
4.Law does not apply to articles like gold, cash, money,
music, hobbies.
5.The shape of utility curve may be affected by the presence
or absence of articles which are substitutes to it.
IMPORTANCE:

1.Framing taxation policy by the government.

2.Useful to consumer to regulate his expenditure.
3.Useful to monopolist producer in fixing the prices
of his products.
4.Bases for law of demand.
5.Differentiate value-in-use and value-in-exchange.
CONSUMER BEHAVIOR:

 It is a study of how individual customers, group 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.
 It is the decision process and physical activities,
which individuals engage in when evaluating,
acquiring, using or disposing of goods and services.
NATURE OF CONSUMER BEHAVIOR:
1.Influenced by various factors such as:

• Marketing factors – such as product design, price,

promotion, packaging, positioning and distribution.
• Personal factors – such as age, gender, education, and
income level.
• Psychological factors – such as buying motives, perception
of the product and attitudes towards the product.
• Situational factors – such a s social status, reference groups
and family.
• Cultural factors – such as religion, class, caste, and sub-
castes.
NATURE OF CONSUMER BEHAVIOR:
2. Consumer behavior is not static.
3. It varies from consumer to consumer.
4. It varies from region to region and country to country.
5. Information on consumer behavior is important to the
marketers which factors include:
a. Product design/model
b. Promotion of the product.
c. Positioning
d. Pricing of the product
e. Packaging
f. Place of distribution
NATURE OF CONSUMER BEHAVIOR:

6. It leads to purchase decision.

7. It varies from product to product.
8. It improves standard of living.
9. It reflects status of customer.