Consumer Behaviour And Consumer Equilibrium

PPT for the topic Consumer Behaviour And Consumer Equilibrium

1. Consumer Behaviour & Consumer Equilibrium ECONOMICS SEMINAR ( GROUP-6)

2. Consumer Behaviour & Equilibrium 01 02 Consumer Behaviour Consumer Equilibrium CONSUMER BEHAVIOUR Meaning of Utility Meaning of Utils Concept of TU & MU Relationship between TU & MU Meaning of DMU Meaning of IC Features of IC Law of DMRS Budget Line Indifference Map

3. Meaning of Utility: The Want Satisfying Power Of A Commodity Is Termed As ‘Utility’. Meaning of Utils: The Unit Of Measuring Consumer’s Satisfaction Is Termed As ‘Utils’ Meaning of Total Utility (TU) TU (Total Utility) Refers To The Total Satisfaction Derived From Consumption Of A Commodity. TU = ∑MU Meaning of Marginal Utility (MU) MU (Marginal Utility) Refers To Addition In TU Due To One Additional Unit Of Consumption Of The Commodity. MU = TUn – TUn-1

4. Re lationship Between TU & MU Units TU MU 1 10 10 2 18 8 3 24 6 4 28 4 5 30 2 6 30 7 28 -2 When TU increases at a diminishing rate, MU falls When TU is maximum, MU is zero (0). When TU falls, MU becomes negative. MU is derived from TU.

5. LAW OF DIMINISHING MARGINAL UTILITY According to this Law: “As a consumer consumes more & more units of a commodity, MU derived from additional units goes on falling i.e., the utility derived from each successive unit falls.” Assumptions of LAW of DMU: Cardinal measurement of Utility The consumer is rational Continuous consumption MU of rupee remains constant Fixed income & price

6. Indifference Curve An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curve indicates that a consumer is indifferent between the two and all points give him the same utility. It shows how many units of clothing is the consumer willing to give up in  exchange  for an additional unit of food so that his level of satisfaction remains unchanged. Combina-tion Food Clothing A 1 12 B 2 6 C 3 4 D 4 3

7. Indifference Map An Indifference Map is a set of Indifference Curves. It depicts the complete picture of a consumer’s preferences. I t is important to note that the consumer prefers the combinations on the higher indifference curves to those on the lower ones. A higher indifference curve implies a higher level of satisfaction. Therefore, all combinations on IC1 offer the same satisfaction, but all combinations on IC2 give greater satisfaction than those on IC1.

8. Properties of Indifference Curve 1. Indifference Curve slopes downwards towards the right. (Monotonic Preferences) 2.Indifference Curve is always convex to the origin. (Law of Diminishing Marginal Rate of Substitution) 3. Higher Indifference Curve indicates higher level of satisfaction 4. Two Indifference Curves never intersect each other.

9. LAW OF DIMINISHING MARGINAL RATE OF SUBSTITUTION Marginal rate of substitution means the rate at which a consumer will sacrifice the successive units of one good for a marginal increase in another good. This law states that the rate of substitution goes on diminishing due to which the Indifference Curve is convex.

10. Budget Line The Budget Line, which is also known as Budget Constraint, is a graphical representation of all the combinations of two commodities that a customer can manage to afford at the provided market prices and within the particular earning degree. It is identical to the real income line of the customer. It is a negatively sloped straight line. Budget Line Equation is given by:- M = Px  ×  Qx  +  Py  ×  Qy  

11. Consumer’s Equilibrium A consumer is said to be in equilibrium when he maximizes his satisfaction at a given income and prices of the commodities. Two approaches are used to know how much of a commodity should a consumer buy. These are: 1. Utility approach 2. Indifference curve approach

12. Utility Approach: In Case of Single Commodity Units of goods (X) MU(x) Price of good (x) 1 8 5 2 6 3 5 5 4 4 5 5 3 5 MUx = Px A consumer purchasing a single commodity will be at equilibrium, when he is buying such a quantity of that commodity, which gives him maximum satisfaction.

13. Utility Approach: In case of Double Commodity According to a two commodity case a consumer will so allocate his expenditure so that the utility gained from the last rupee spent on each commodity is equal. It is derived as : MUx / Px = MUy / Py

14. Indifference Curve Approach Under the indifference curve approach, the point of maximum satisfaction is achieved by studying indifference map and budget line together. The consumer’s equilibrium must meet the following two conditions: i ) (MRS) xy  = PX/PY ii) MRS continuously falls

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