Anika Tahsin Mou

Lecturer
Department of Agricultural
Economics
Concept 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.

"Consumer behaviour is the decision process and

physical activity, which individuals engage in when
evaluating, acquiring, using or disposing of goods and
services". - Louden and Bitta
Nature of Consumer Behaviour
1. Influenced by various factors:
Factors which influence consumer behaviour:
▪ 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 as physical surroundings at the time of purchase,
social surroundings and time factor.
▪ Social factors such as social status, reference groups and
family.
▪ Cultural factors, such as religion, class, caste & sub-castes.
Nature of Consumer Behaviour
2. Consumer behavior is not static
3. Varies from consumer to consumer
4. Varies from region to region and country to county
5. Information on consumer behavior is important to the
marketers:
Factors for marketing decisions:
a) Product design/model b) Pricing of the product
d) Packaging
c) Promotion of the product
f) Place of distribution
e) Positioning
Nature of Consumer Behaviour
6. Leads to purchase decision
7. Varies from product to product
8. Improves standard of living
9. Reflects status of a customer
Consumers are rational and seek to maximize their
satisfaction while staying within their budget.

Budget Constraint/ Budget Line: The amount of funds

the consumers has available to spend on consumer
goods and services .

Consumers purchase ≤ income/ income + borrowing

Budget line
• A budget line shows all those combinations of two goods.
• The consumer can buy spending his given money income at
their given prices.

Consumer Budget states the

real income or purchasing
20 power of the consumer from
----------Books--------

16
which he can purchase certain
12

8
quantitative bundles of two
4
goods at given price.
0
4 8 12 16 20 24 28 32 36 40
-------------Movies---------
Key points for Budget line
1. A Budget line separates what is affordable from what is not
affordable.
2. Budget line slopes downwards as more of one good can be bought
by decreasing some units of the other good.
3. Bundles which cost exactly equal to consumer ’s money
income lie on the budget line.
4. Bundles which cost less than consumer ’s money income
shows under spending. They lie inside the budget line.
5. Bundles which cost more than consumer ’s money income are not
available to the consumer. They lie outside the budget line.
Budget set
A budget set or opportunity set includes all possible consumption bundles that
someone can afford with given the prices of goods and the person's income level.
The budget set is bounded above by the budget line.
.

X
Definitions:
1. Utility: Utility is wants satisfying power of a commodity which varies
from person to person. The concept of utility is ethically neutral as
harmful and useful things are both considered.
Features of Utility
Types of Utility 1. Subjective Concept
1. Form Utility 2. Relative Concept
2. Place Utility 3. No moral consideration
3. Time Utility 4. No objective measurement
4. Service Utility 5. Different from Usefulness
5. Possession Utility 6. Different from Pleasure
7. Depends on Wants
8. Utility is multipurpose
9. Utility is intangible
Marginal utility: The additional utility derived from additional unit of a
commodity. It refers to net addition made to the total utility by the
consumption of an extra unit of a commodity.

Total utility: The sum of utility derived from the different units of a
commodity consumed by a consumer. The amount of utility derived
from the consumption of all units of a commodity which are at the
disposal of the consumer.
Marginal Utility Analysis
This theory is formulated by Alfred Marshall, a British Economist, seeks
to explain how a consumer spends his income on different goods and
services so as to attain maximum satisfaction.
Marginal Utility Analysis
Assumptions of utility analysis:
1. Utility is based on the cardinal concept.
2. Utility is measurable and additive of goods.
3. The marginal utility of money is assumed to be constant.
4. The hypothesis of independent utility.
5. The consumer is rational.
6. He has full knowledge of the availability of commodities and their
technical qualities.
7. Possesses perfect knowledge of the choice of commodities.
8. There are no substitutes.
9. Utilities are not influenced by variations in their prices.
10. The theory ignores complementary between goods.
Law of diminishing marginal utility
The law of marginal utility is based on the human wants. The law was first
developed by German Economist H.H Gossen which is known as
“Gossen’s First law”. Later it was popularized by Prof. Alfred Marshall.

“The additional benefit which a person

derives from a given increase of his
stock of a thing diminishes with every Change in TU
increase in the stock that he already MU=
has”. - Alfred Marshall Change in quantity consumed
Law of diminishing marginal utility
Assumptions:
1. Tastes, preferences, etc of the customer remain constant.
2. Income of the consumer 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.
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. Basis for law of demand.
Graphical representation
Units of Total Margin
apple utility al Diminishing MarginalUtility
consumed utility
20
18 18
1 8 8 15 16
15 TU
13
2 13 5

Utility
10
8
3 16 3 5 5
3
2
4 18 2 0 0
1 2 3 4 5 6 -3 MU
5 18 0 -5

6 15 -3 Units of appleconsumed
Explanation to the graph
•The Total Utility (TU) declines in positive rate but the
Marginal Utility (MU) declines in a negative rate.

•Total utility rises by smaller amounts.

•The negative slope of the marginal utility curve reflects the law of
diminishing marginal utility.

•Saturation point is when the total utility is unchanged.

•Marginal utility declines from larger to smaller units.

 Limitations
1. Different units consumed must be identical and the habit,
taste, income and treatment of the consumer also remain
unchanged.
2. Different units consumed should be standard units.
3. Continuous consumption. i.e. no gap between two
consumption of one unit and another unit.
4. Law does not apply to articles like gold, cash, money,
music, hobbies,
5. The shape of the utility curve may be affected by
the presence or absence of articles which are substitutes
to it.
Conclusion
Utility reflects the tastes of a particular individual,
uniqueness to the individual and reflects his or her
own particular subjective preferences and
perceptions. Utility remain unchanged so long as the
individual’s tastes remain the same.
 Law of Equi-Marginal Utility
-Law of substitution or the law of maximum satisfaction.
- Optimum allocation of income expenditure.

Assumptions:

1. The consumer has limited income or limited stock of a given commodity

2. The consumer has more than one want to satisfy.
3. The consumer is rational and seeks maximum satisfaction.
4. Prices are given.
Statement of the Law
Other things remaining the same, a consumer gets maximum total utility
from spending his given income when he allocates his expenditure to the
purchase of different goods in such a way that the marginal utilities
derived from the last units of money spendt on each item of expenditure
tends to be equal.
Alfred Marshall: Proportionality rule of the law is,

MUa/ Pa = MUb/ Pb = MUc/ Pc = M

Here, M= Marginal Utility of the given money incme

Illustration of the Law
Suppose, Money income = 24 Tk.
3 Products= a, b, c where Pa, Pb and Pc are 2, 3 and 5 Tk./unit
respectively
Marginal Utility Schedule: Computation of Equi-
Units 1 2 3 4 5
Marginal utility: Units MUa/ Pa MUb/ Pb MUc/ Pc

MUa 30 20 16 8 6 1 15 8 3

2 10 5 2
MUb 24 15 9 6 3
3 8 3 1.6
MUc 15 10 8 5 1
4 4 2 1

5 3 1 0.2
So, consumer’s optimum allocation of expenditure is
Tk. 10 on product a, thus purchasing its 5 units
Tk. 9 on proudct b, thus purchasing its 3 units
Tk. 5 on product c, thus purchasing its 1 unit.

Total Utility= TUa+ TUb+ TUc

= 80+ 48 + 15
= 143
It is the maximum aggregate satisfaction.
 Ordinal and cardinal approach
Part 1
1. Ordinal Approach: Utility is not measurement, but is an ordinal magnitude.
Part 2
2. Cardinal Approach: Under certainty of full knowledge about the market conditions
and income levels, some economists have suggested that utility can be measured by
Part 3 monetary.

Part 4

Part 5

Part 6
 Indifference Curve Analysis
Part 1
• A very popular, easier and scientific method of explaining consumer ’s demand is the
indifference curve analysis.
Part 2 • An indifference curve represents the same level of satisfaction of a consumer from different
combinations of two commodities.
Part 3
• Human satisfaction is psychological phenomenon which cannot be measured in terms of
monetary terms.
Part 4 This approach is more realistic to order preferences.
•Consumer preference approach is therefore an ordinal concept .
Part 5

Part 6
 Indifference map
Part 1
A set of indifference curves which rank the preferences of the consumer.

Part 2
Combinations of goods
Part 3 situated on an indifference
curve yield higher level of
satisfaction and are
Part 4 preferred.
Combinations on the
Part 5 lower indifference curve
yield a lower utility.
Part 6
 Indifference Curve Analysis
Part 1 Assumptions of an
indifference curve:
Part 2 1. Rational consumers.
2. Two commodities
Part 3 3. Utility is ordinal
4. Diminishing marginal rate of
substitution
Part 4 5. Total utility of the consumer
depends on the quantities of
Part 5 the commodities consumed.
6. Consistency and transitivity of
Part 6 choice
Properties of an Indifference
Curve
1. Indifference Curve slopes downward to the right.
2. Indifference Curves are convex to the origin.
3. Indifference curves cannot intersect each other.
4. A higher indifference curve shows a higher level of satisfaction.
 Marginal Rate of Substitution
Part 1 MRS is the rate at which the consumer is willing to substitute one good
for another
Part 2 Y
A
12
MRS of X for Y = ∆X/∆Y
Part 3
MRS=6
10
-6
8
B
Part 4 6
MRS=1
Clothing

1 -2
4 C
1 D
-1
Part 5 2 1

Part 6 1 2 3 4 5 X
Food
 Indifference Curve Analysis
Part 1
Combi- Food Clothing MRS Y
Part 2 nation 12 A
Convex to the origin
10
Part 3 A 1 12 0

Clothing
8
Utility obtained
B
Part 4 B 2 6 6 6 from point A,B,C are
C same
4
C 3 4 2 IC
Part 5 2

D 4 3 1 1 2 3 4 5 6 X
Part 6 Food
 Optimal choice of the consumer/
Part 1
Consumer’s equilibrium
Part 2 ▪ A consumer derives maximum possible satisfaction from the
goods at equilibrium position.
▪ A consumer cannot rearrange his purchase of goods at that level.
Part 3
Assumptions:
1. The consumer has given indifference map which shows his
Part 4 scale of preferences for various combinations of two goods X and Y.
2. He has a fixed money income which he has to spend fully on goods X
Part 5 and Y.
3. The prices of goods X and Y are given fixed for him.
Part 6
 Consumer’s equilibrium
According to the graph:

Part 1 • IC1, IC2, IC3, IC4, IC5 are the indifference curves
• PL is the budget line for goods X and Y.
Part 2 • Combinations R, S, Q, T, H cost the same.

Y The customer ’s a i m is to reach highest

indifference curve which maximizes his
Part 3 P satisfaction.
R
S ❖R or H lies on a lower
Part 4
indifference curve IC1,
N Q
IC5 ❖ S or T lies on a lower
Part 5 T
IC4 indifference curve IC2,
IC3
H IC2
❖Whereas, IC4 and IC5 are beyond t h e
Part 6 IC1
consumer ’s money income.
0 M L X
 Consumer’s equilibrium
Part 1
“Consumer
MUx MUy
Part 2
will decide Q Utility maximization rule: =
as the best Px Py
choice which
Part 3 MUx MUy
lies on the if  buy more of 'x'
budget Px Py
Part 4 line and also
puts him on MUx MUy
highest if  buy more of 'y'
Part 5 possible Px Py
indifference
Part 6 curve IC3”.