The document discusses consumer behavior and consumer choice. It explains that consumer behavior analyzes how individuals purchase goods to satisfy needs and desires. Consumer choice is influenced by demographic, economic, and psychological factors. The consumer's budget constraint shows the different combinations of goods that can be afforded given their income. Indifference curves represent different levels of satisfaction from consuming goods, and the optimal choice is where the indifference curve is tangent to the budget constraint. An example is provided to illustrate how a consumer would optimize their choice between two goods based on prices, marginal utility, and their budget.
The document discusses consumer behavior and consumer choice. It explains that consumer behavior analyzes how individuals purchase goods to satisfy needs and desires. Consumer choice is influenced by demographic, economic, and psychological factors. The consumer's budget constraint shows the different combinations of goods that can be afforded given their income. Indifference curves represent different levels of satisfaction from consuming goods, and the optimal choice is where the indifference curve is tangent to the budget constraint. An example is provided to illustrate how a consumer would optimize their choice between two goods based on prices, marginal utility, and their budget.
The document discusses consumer behavior and consumer choice. It explains that consumer behavior analyzes how individuals purchase goods to satisfy needs and desires. Consumer choice is influenced by demographic, economic, and psychological factors. The consumer's budget constraint shows the different combinations of goods that can be afforded given their income. Indifference curves represent different levels of satisfaction from consuming goods, and the optimal choice is where the indifference curve is tangent to the budget constraint. An example is provided to illustrate how a consumer would optimize their choice between two goods based on prices, marginal utility, and their budget.
The document discusses consumer behavior and consumer choice. It explains that consumer behavior analyzes how individuals purchase goods to satisfy needs and desires. Consumer choice is influenced by demographic, economic, and psychological factors. The consumer's budget constraint shows the different combinations of goods that can be afforded given their income. Indifference curves represent different levels of satisfaction from consuming goods, and the optimal choice is where the indifference curve is tangent to the budget constraint. An example is provided to illustrate how a consumer would optimize their choice between two goods based on prices, marginal utility, and their budget.
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Consumer behavior and Consumer choice
The field of consumer behavior analyzes how individuals, groups and organization purchase goods and services to satisfy their needs and desires. Consumer behavior that consumer shows in searching, purchasing, using of products and services that they expect will satisfy their needs. Thus, consumer behavior is the study of the decision-making process involved in acquiring, consuming and disposing products.
Importance
i. Efficient use of marketing resource: it is important to know why consumers buy the product and how they respond to marketing inputs. ii. Locating new markets. iii. Selecting market segments. iv. Product positioning. v. Market research vi. Developing marketing strategy.
Factors affecting consumer behavior
A. Demographic factors i. Age ii. Sex iii. Income iv. Family size B. Economic factors i. Rational behavior: logical thinking based on cost and benefits. ii. Budget constraints iii. Insatiable desires C. Psychological factors i. Learning: based on result of practice or experience. ii. Motivation: motivated by the need. iii. Perception: iv. Personality v. Attitudes vi. Love and affection
When you walk into the store, you are confronted with thousands of goods that you might buy. Of course, because your financial resources are limited, you cannot buy everything you want. You therefore consider the prices of the various goods being offered for sale and buy bundle of goods that, given your resources, best suits your needs and desires. The consumer’s budget constraint
The budget constraint shows the various bundles of good that the consumer can afford for a given income.
B Quantity of A 500
C 250
50 100
Quantity of B
Most people would like to increase the quantity or quality of good they consume. People consume less than they desire because their purchase power or spending is constrained, or limited, by their income.
For example, a person buys two products A and B. his income is Rs 1,000 and product A’s price is Rs 2 while product B’s price is Rs 10. In the above graph, at point A the consumers buys no product A and buys 100 units of product B. At point B, s/he buys no Product B and buys 500 units of product A. At point C he buys 250 units of product A and 50 units of product B. point C which is the exactly the middle of the line from point A to point B, he spends an equal amount on product A and B. Point A,B and C are only three combination among many other combination which consumer can select. This line ( from point A to point B), which is called budget constraint, shoes the consumption bundles that the consumer can afford. The slope of budget constraint measures the rate at which the consumer can trade one good for another.
Consumer’s optimal choices
Indifference curve: a curve that’s shows consumption bundles that give the consumer the same level of satisfaction. The point at which this indifference curve and the budget constraint touch is called the optimum. At the optimum, the slope of the indifference curve equals the slope of the budget constraint, thus we can say indifference curve is tangent to budget constraint. It is that combination which the consumer can choose to derive optimum satisfaction within his budget. Quantity of A Optimum
IC2
IC1 Budget constraint
Quantity of B
The consumer would always want to get to higher indifference curve (IC2) because he would get higher amount of product A and B at any point in IC2. But, he cannot do so because his budget constraint would not allow him o do so. He will choose that combination in this case the optimum satisfaction he can derive from, which is on IC1. If he wants to consume higher amount of product A and B he has to increase his income which will shift his budget constraint to right and a new optimum will be achieved.
Example
Utility: amount of satisfaction derived from consumption of a commodity.
Cardinal utility: assumes that some value can be assigned.
Ordinal utility: does not assign value.
Total utility (TU): the overall level of satisfaction derived from consuming good or service.
Marginal utility (MU): Additional satisfaction that an individual derives from consuming an additional unit of good or service.
∆ TU MU= ∆Q
∆TU = change in total utility
∆Q = change in quantity
Quantity TU MU 0 0 0 1 20 20 Consumer’s objective is to maximize his utility with respect to budget 2 27 7 constraint. 3 32 5 4 35 … Marginal utility per peso is an additional utility derived from spending 5 35 … the next peso on the good. 6 34 …. 7 38 …. MU per peso=MU /P
The consumers optimizing condition is given by;
MUA/PA =MUB/PB
MUA = Marginal utility of A
PA = Price of A
MUB = Marginal utility of B
PB = Price of B
This is the condition where consumers spend equally on product A and B. For e.g. if marginal utility per peso of A is greater than Marginal utility per peso of B, it indicated that consumer is spending more on product A than on product B.
Let’s check what amount of product A and B selects to derive optimum utility at the given income which is equal to Rs 46.
Combination X where he can choose 3 units of A and 4 units of product B
Combination Y where he can choose 5 units of A and 5 units of B
The consumer will always try to get combination Y because he gets to enjoy more of product A and B. in this case whether he chooses Combination X or Y depends on his income. For this let us calculate the cost of each combination,
Total expenditure= PA QA X PB QB
Expenditure of combination X = 2x3+10x4 = 46
Expenditure of Combination Y = 2x5 + 10x5 = 60
The consumer will always try to get Combination Y which costs Rs 60., but he can only get Combination Y if his income is Rs 60. Since, his income is Rs 46; he cannot afford Combination Y and can only afford Combination X whose total expenditure is Rs 46. If he wants Combination Y he has to increase his income.
