Theory of Consumer behaviour · Theory of Consumer behaviour We discuss how a consumer achieves...
Transcript of Theory of Consumer behaviour · Theory of Consumer behaviour We discuss how a consumer achieves...
Theory of Consumer behaviour
The theory of consumer behaviour analyses how a consumer maximises his satisfaction from his
consumption expenditure.
Theory of Consumer behaviour
There are three important theories on consumer behaviour.They are :
1. Cardinal Utility Approach of Alfred Marshal l
2. Ordinal Utility Approach of J. R. Hicks
3. Revealed Preference Hypothesis of Paul A. Samuelson
Theory of Consumer behaviour
We discuss how a consumer achieves equilibrium according to the Ordinal Utility Approach.
Ordinal Utility Approach is also known as
Indifference curve Approach.
O X1
b
X'2
X2
a
IC
( X1, X
2 )
( X'1, X'
2 )
Fact
or 2
X'1
Factor 1
Consumption bundleLet us assume that there are only two goods. They Are good 1 and good 2.Any combination of the amount ofthe two goods is cal led a consumption bundle.Let X 1 be the amount of good 1 and X2 the amount of good 2 ( X 1 , X2 ) can be cal led a consumption bundle. X 1 and X2 can be positive or zero.
Consumption bundle
Consumer's Budget
The consumption bundles that are available to the consumer depend on the prices of the two goodsand the income of the consumer.
Given her fixed income and the prices of the two goods, the consumer can afford to buy only those bundles which cost her less than or equal to her income. This is cal led the consumer's budget.
Budget Set
Suppose the income of the consumer is MPrice of good 1 is P 1
Price of good 2 is P2.
If the consumer wants to buy X 1 units of good 1, she
wil l have to spend P 1X 1 amount of money.
If the consumer wants to buy X2 units of good 2,
she wil l have to spend P2X2 amount of money.
So if the consumer wants to buy X 1 units of good 1
and X2 units of good 2 ,she wil l have to spend
P 1X 1 + P2X2 amount of money.
Budget Set- Definition
The col lection of al l bundles that the consumer can buy with her income at the prevailing market prices
Is cal led the budget set.
Budget Set- Definition
The consumer can buy any bundle (X 1 ,X2)Such that :
P 1 X 1 + P2 X2 < M
The set of bundles available to the consumer Is cal led budget set.
Budget Set- Definition
Given the prices of the goods and income of the consumer,She can choose any bundle as long as it costs
less than or equal to her income.
Budget Constraint
The consumer can buy any bundle (X 1 ,X2)Such that :
P 1 X 1 + P2 X2 < M
This inequality is cal led Budget constraint
Budget constraint
ആപപ്പിള150
ഓറഞഞ100
How is it possible?It costs 150 X2 =300 +
100 X3 = 300 = 600 rupees.