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 UtilitySatisfactions Utility implies expected satisfaction Satisfaction stand realizes satisfaction. Consumer thinks of utility when he is contemplating the purchase of commodity. He secures the satisfaction only after consumer commodity. Utility can be measured through indirectly Satisfaction cannot be measured, directly or indirectly

Measurement of Utility Utility is a subjective or introspective: concept related to the inner sentiments & emotions of the consumer. 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. 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. 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. 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. 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. 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. 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. 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  No Change 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.  Price of the different units & of the substitutes of the commodity should remain the same.

Assumption of Law  The mental 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  This law 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. Consumer buy more of a good when its price decrease &less when its price increase. When price Demand When price Demand When price Demand When price Demand Goes up… goes down… goes down goes up 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 goes up buy more When income Consumers goes up buy more 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 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 people buy more Sale 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. 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 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. 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. 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 % 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.  It is 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  Positive income 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 % change in quantity demanded of x Cross elasticity = % change in quantity % change in quantity demanded of y 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 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 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 % 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. 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 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 (K.G.) (K.G.) Marginal Utility (prices which consumer is willing to pay) Actual Price (paid) Consumer’ s Surplus (K.G.) = = = = = =-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.