Module II

Consumer Behavior and Utility

analysis
 Meaning of utility
 Utility may be defined as the power of a
commodity or service to satisfy a human
want.
 Utility: The sense of pleasure , or
satisfaction , that comes from
consumption.
 Utility Analysis
 Utility resides in the mind of the consumer.
 Utility cannot be equated with usefulness
 Utility carries no moral & legal
significance.
 It depends upon the mental make up of
the consumer of the commodity.
 Utility And Satisfaction
Utility Satisfactions
Utility implies expected Satisfaction stand
satisfaction realizes satisfaction.

Consumer thinks of He secures the

utility when he is satisfaction only after
contemplating the consumer commodity.
purchase of commodity.
Utility can be measured Satisfaction cannot be
through indirectly measured , directly or
indirectly
 Measurement of Utility
Utility is a subjective or introspective:
concept related to the inner sentiments &
emotions of the consumer.
As such it is not possible to measure
directly the utility of a commodity to a
consumer.
But an indirect measure of utility
does exist in the price which is paid by
consumer for a particular commodity.
 Measurement of utility
Example:- If a consumer is ready to pay .50
paisa for an apple & .25 paisa for an
orange, then the utility of the apple to the
consumer is twice that of the orange.
In other word utility of two different
commodity to a single consumer can be
measured by prices that he is willing to
pay for them.
 Total utility and Marginal utility
 Total utility:- The total benefit a person gets
from the consumption of goods. Generally, more
consumption gives more utility.
Total utility from a good increase as the
quantity of the good increase.

Example:- as the number of movies seen in a

month increases, total utility from movies
increase
 Marginal Utility
Marginal Utility:- is the change in total utility that
results from a one unit increase in the quantity
of a good consumed.
As the quantity consumed of a good
increase, the marginal utility from consuming it
decreases.
Marginal utility from a good decreases
as the quantity of the good increases.

Example:- As the number of movies seen in a

month increases, marginal utility from movies
decreases.
Basic Laws of Marginal Utility

 Law of Diminishing Marginal Utility.

 Law of Equi Marginal Utility.

 Law of Diminishing Marginal
Utility
 Law of Diminishing Marginal utility says that as a
person purchase more & more units of a
commodity, its marginal utility decline.
Example:- Suppose a person starts eating Apple,
the first apple gives him great pleasure. By the
time he is taking second he yield less
satisfaction ,the satisfaction of third is less than
that of second and so on . The additional
satisfaction goes on decreasing with every
successive apple till it drops down to zero ; and
if the consumer forced to take more the
satisfaction may become zero.
Diagrammatic Representation
 Assumption of Law
 NoChange in Consumer’s taste (there
should be one thing)

 Suitable units( not too small or not too big)

 Assumption of Law
 No time gap between consumption of two units.

 Priceof the different units & of the substitutes of

the commodity should remain the same.
 Assumption of Law
 Themental situation of the consumer
should remain the same.

 Constant Income, fashion .

 Exception to the law of
diminishing marginal utility
 Consumption of liquor is not subject to the
law.

 Law of diminishing marginal utility does

not apply to money.
 Exception to the law of
diminishing marginal utility
 Thislaw is not applicable of such hobbies
as a collection of stamps, old painting,
coins etc.
 What is Demand?
Quantities of a particular good or
service are consumers willing & able
to buy at different possible prices.
 Law of Demand
Consumer buy more of a good when its
price decrease &less when its price
increase.
When price Demand When price Demand
Goes up… goes down… goes down goes up
Demand Curve
 Factors of Demand
1.Changes in income ( the income
effect
When income Consumers
goes up buy more

When income Consumers

goes up buy more
 Factors of demand
2.Prices or availability of substitute
(Substitute effect)…
A substitute of a good that can be used
in place of other.
 Factors of demand
3. Prices or availability of
Complementary goods….
Complementary goods are thing that
are often are sold or used together
 Factors of demand
4. Changes in the number of buyers.

More people
buy
more Sale
 Factors of demand
5 . Change in taste & preferences
 What is Supply?
Supply refers to the schedule of the
quantities of a good that the firm are
able & willing to offer for sale at
various Price.
Thus supply is relationship
between the price of a commodity
and the quantity supplied at various
possible prices
 Law of Supply
 Tendency of suppliers to offer more of
a good at a higher price & less at
lower prices.
 When price Supply When price supply
Goes up… goes up… goes down goes down
Supply Curve
 Determinants of supply
1. Cost of inputs (factors of Production)
When production supply
costs goes up goes down

When production Supply costs

goes down goes up
 Determinants of supply
 2. Changes in productivity
When productivity supply
goes up goes up

When productivity Supply

goes down goes
down
 Determinants of supply
3. Changes in the number of sellers in
the market….
 More sellers in the market =
increase supply.
 Fewer seller in the market =
decrease supply
 Elasticity Of Demand
 Law of demand indicate only direction of
change in quantity demanded in response
to change in price.
But elasticity of demand states with
how much or to what extent the quantity
demanded will change in response to
change in price.
 “ Elasticity means functional
relationship between variable”.
 Determinants of Elasticity
 Time Period:- The longer time under
consideration the more elastic a good is likely to
be.
 Number and closeness of substitute:-The
greater the number of substitute, the more
elastic.
 The proportion of income taken up by
the product:- the smaller the proportion the
more elastic.
 Luxury or necessity
 Types of Demand Elasticity

 Income Elasticity
 Cross Elasticity
 Price Elasticity
 Price Elasticity of Demand
 Price elasticity of demand:-is the
percentage change in quantity demanded
given a percentage change in price.

 It is measure how much the quantity

demanded of good responds to a change
in the price of that good.
 Computing the price elasticity of
demand
The price elasticity of demand is computed
as the percentage change in the quantity
demanded divided by percentage change
in price.

Price elasticity % change in Qd

of demand =
% change in price
 Determinants of price elasticity of
Demand
 The availability of substitutes .
 The proportion of consumer’s income
spent.
 The number of uses of a commodity.
 Complementary goods.
 Time & elasticity.
 Kinds of Price Elasticity
 Perfectly elastic demand.
 Relatively elastic demand.
 Elasticity of demand equal to utility.
 Relatively inelastic demand.
 Perfectly inelastic demand
 Perfectly Elastic Demand
 When the demand of the product
changes increase or decrease even
there is no change in price. it is
known as perfectly elastic demand.
 Relatively elastic demand
 When the proportionate change in
demand is more than proportionate
change in price is known as relatively
elastic demand,
Elasticity of demand equal to utility.
 When the proportionate change in
demand is equal to the proportionate
change in price is known as unitary
elastic demand
 Relatively inelastic Demand.
 When the proportionate change in the
demand is less than the proportionate
change in the price is known as
relatively inelastic demand
 Perfectly inelastic demand
 When a change in price, howsoever large
change, no changes in quality demand it
is known as Perfectly inelastic demand
 Income Elasticity of Demand
 Income elasticity of demand measures
how much the quantity demanded of good
responds to a change in consumer’s
income.

 Itis computed as the percentage change

in the quantity demanded divided by the
percentage change in income
 Computing Income elasticity of
Demand
Income elasticity % change in Quantity
demanded
of demand = % Change in Income
 Kinds of Income elasticity of
Demand
 Positiveincome elasticity of demand.
 Negative income elasticity of demand.
 Zero income elasticity of demand.
 Positive Income elasticity of
demand
Income elasticity equal to one.
Income elasticity greater than one.
Income elasticity lesser than one
Negative income elasticity of
demand
Zero income elasticity of demand.
 Cross Elasticity of demand
 Cross elasticity of demand express the
relationship between the change in the demand
for a given product in response to a change in
the price of some other product.

 The relationship of two commodities x & y can

be either substitute of each other, or
complementary to each other, or completely
independent to each other
 Computing cross elasticity of
Demand
% change in quantity
demanded of x
Cross elasticity =
% change in quantity
demanded of y
 Elasticity of Supply
Elasticity of supply :- It may be defined as the
responsiveness of the sellers to change in price
of the commodity.
The supply of the commodity may
increase or decrease consequent upon the
change in its price.
The extent to which the supply of the
commodity increase or decrease as a result of
the change in price is referred to as elasticity of
supply
Computing the Elasticity of Supply
The elasticity of Supply is computed as the
percentage change in the quantity
supplied divided by percentage change in
price.

Elasticity of % change in quantity

Supply = supplied

% change in price
Determinants of Elasticity of Supply
 Time.
 Nature of industry.
 Limited supply of specific inputs.
 Cost of production.
 Nature of the product.
 High/law taxation.
 Price level.
 Number of seller.
 Kinds of Elasticity of Supply
 Perfectly elastic.
 Perfectly inelastic
 Perfectly Elastic Supply
 When the supply of the product
changes increase or decrease even
there is no change in price. it is
known as perfectly elastic
 Perfectly Inelastic Supply
 When a change in price, howsoever
large change, no changes in quality
Supply it is known as Perfectly
inelastic.
 Consumer Surplus
Consumer surplus is simply the difference
between the price that “ one is willing to pay”
and “the price one actually pays” for a particular
product.
It has been found that people are
prepared to pay more price for the goods than
they actually pay for them. This extra
satisfaction which the consumer obtain from
buying a good has been called consumer
surplus
 Consumer Surplus
 Example:- If a person is willing to pay for an
electric lamp Rs.35/-, if necessary, which in fact,
he buys for Rs.30/-, it could be said that he
obtain RS 5/- worth of consumer’s surplus.
 Formula:-
Consumer surplus = what a consumer
is willing to pay(--)
what he actually pays
 Definition of consumer Surplus
 Marshall :-” Excess of the price which a
consumer would be willing to pay rather
than go without a thing over that which he
actually does pay is the economic
measure of this surplus satisfaction it may
be called Consumer Surplus”.
 Marshall’s Measure of consumer
Surplus
Quantity of sugar Marginal Utility Actual Consumer’
(K.G.) (prices which Price s Surplus
consumer is (paid) (K.G.)
willing to pay)
1 20 13 20-13=7
2 18 13 18-13=5
3 16 13 16-13=3
4 14 13 14-13=1
5 13 13 13-13=0
6 11 13 11-13=-2
Graphical representation
Assumption of Consumer’s surplus
1. Utility & Satisfaction have a relationship.
2. Consumer surplus derived from the
demand curve.
3. Utility of commodity depend upon the
quality.
4. No substitute.
5. No change in taste, fashions.
6. Marginal utility of particular commodity
should be remain constant.