Theory of Consumer Behaviour class 11 Introduction
In this chapter, we will study the behavior of an individual consumer. The consumer has to decide how to spend her income on different goods. Economists call this the problem of choice. Most naturally, any consumer will want to get a combination of goods that gives her maximum satisfaction. What will be this ‘best’ combination?
This depends on the likes of the consumer and what the consumer can afford to buy. The ‘likes’ of the consumer are also called ‘preferences’. And what the consumer can afford to buy, depends on the prices of the goods and the income of the consumer. This chapter presents two different approaches that explain consumer behavior: (i) Cardinal Utility Analysis and (ii) Ordinal Utility Analysis.
Preliminary Notations and Assumptions
A consumer, in general, consumes many goods; but for simplicity, we shall consider the consumer’s choice problem in a situation where there are only two goods: bananas and mangoes. Any combination of the amount of the two goods will be called a consumption bundle or, in short, a bundle.
In general, we shall use the variable x1 to denote the quantity of bananas and x2 to denote the quantity of mangoes. x1 and x2 can be positive or zero. (x1, x2) would mean the bundle consisting of x1 quantity of bananas and x2 quantity of mangoes. For particular values of x1 and x2, (x1, x2), would give us a particular bundle. For example, the bundle (5,10) consists of 5 bananas and 10 mangoes; the bundle (10, 5) consists of 10 bananas and 5 mangoes.
Cardinal Utility Analysis assumes that the level of utility can be expressed in numbers. For example, we can measure the utility derived from a shirt and say, this shirt gives me 50 units of utility. Before discussing further, it will be useful to have a look at two important measures of utility.
Measures of Utility
Total Utility: The total utility of a fixed quantity of a commodity (TU) is the total satisfaction derived from consuming the given amount of some commodity x. More of commodity x provides more satisfaction to the consumer. TU depends on the quantity of the commodity consumed. Therefore, TUₙ refers to the total utility derived from consuming n units of a commodity x.
Marginal Utility: Marginal utility (MU) is the change in total utility due to the consumption of one additional unit of a commodity. For example, suppose 4 bananas give us 28 units of total utility and 5 bananas give us 30 units of total utility. Clearly, consumption of the 5th banana has caused the total utility to increase by 2 units (30 units minus 28 units). Therefore, the marginal utility of the 5th banana is 2 units.
[MU₅ = TU₅ – TU₄ = 30 – 28 = 2]
In general, MUₙ = TUₙ – TUₙ₋₁, where subscript n refers to the nth unit of the commodity.
Total utility and marginal utility can also be related in the following way:
[TUₙ = MU₁ + MU₂ + … + MUₙ₋₁ + MUₙ]
This simply means that TU derived from consuming n units of bananas is the sum total of the marginal utility of the first banana (MU₁), the marginal utility of the second banana (MU₂), and so on, till the marginal utility of the nth unit.
Table No. 2.1 and Figure 2.1 show an imaginary example of the values of marginal and total utility derived from the consumption of various amounts of a commodity. Usually, it is seen that the marginal utility diminishes with an increase in the consumption of the commodity.
This happens because having obtained some amount of the commodity, the desire of the consumer to have still more of it becomes weaker. The same is also shown in the table and graph.
Notice that MU₃ is less than MU₂. You may also notice that total utility increases but at a diminishing rate: The rate of change in total utility due to a change in the quantity of the commodity consumed is a measure of marginal utility.
This marginal utility diminishes with an increase in consumption of the commodity from 12 to 6, 6 to 4, and so on. This follows from the law of diminishing marginal utility. The Law of Diminishing Marginal Utility states that the marginal utility from consuming each additional unit of a commodity declines as its consumption increases while keeping the consumption of other commodities constant.
MU becomes zero at a level when TU remains constant. In the example, TU does not change at the 5th unit of consumption, and therefore MU₅ = 0. Thereafter, TU starts falling, and MU becomes negative.
Theory of Consumer Behaviour class 11 Derivation of Demand Curve in the Case of a Single Commodity (Law of Diminishing Marginal Utility)
Cardinal utility analysis can be used to derive the demand curve for a commodity. What is demand and what is the demand curve? The quantity of a commodity that a consumer is willing to buy and is able to afford, given the prices of goods and income of the consumer, is called demand for that
commodity. Demand for a commodity x, apart from the price of x itself, depends on factors such as prices of other commodities (see substitutes and complements 2.4.4), income of the consumer, and tastes and preferences of the consumers.
The demand curve is a graphic presentation of various quantities of a commodity that a consumer is willing to buy at different prices of the same commodity while holding constant prices of other related commodities and the income of the consumer.
Figure 2.2 presents a hypothetical demand curve of an individual for commodity x at its different prices. Quantity is measured along the horizontal axis, and price is measured along the vertical axis.
The downward-sloping demand curve shows that at lower prices, the individual is willing to buy more of commodity x; at higher prices, she is willing to buy less of commodity x. Therefore, there is a negative relationship between the price of a commodity and the quantity demanded, which is referred to as the Law of Demand.
An explanation for a downward-sloping demand curve rests on the notion of diminishing marginal utility. The law of diminishing marginal utility states that each successive unit of a commodity provides lower marginal utility.
Therefore, the individual will not be willing to pay as much for each additional unit, and this results in a downward-sloping demand curve. At a price of Rs. 40 per unit of x, the individual’s demand for x was 5 units. The 6th unit of commodity x will be worth less than the 5th unit. The individual will be
willing to buy the 6th unit only when the price drops below Rs. 40 per unit. Hence, the law of diminishing marginal utility explains why demand curves have a negative slope.
Ordinal Utility Analysis
Cardinal utility analysis is simple to understand but suffers from a major drawback in the form of quantification of utility in numbers. In real life, we never express utility in the form of numbers. At most, we can rank various alternative combinations in terms of having more or less utility.
In other words, the consumer does not measure utility in numbers, though she often ranks various consumption bundles. This forms the starting point of this topic – Ordinal Utility Analysis.
A consumer’s preferences over the set of available bundles can often be represented diagrammatically. We have already seen that the bundles available to the consumer can be plotted as points in a two-dimensional diagram. The points representing bundles that give the consumer equal utility can generally be joined to obtain a curve like the one in Figure 2.3.
The consumer is said to be indifferent to the different bundles because each point of the bundles gives the consumer equal utility. Such a curve joining all points representing bundles among which the consumer is indifferent is called an indifference curve. All the points such as A, B, C, and D lying on an indifference curve provide the consumer with the same level of satisfaction.
It is clear that when a consumer gets one more banana, he has to forego some mangoes so that her total utility level remains the same, and she remains on the same indifference curve. Therefore, the indifference curve slopes downward.
The amount of mangoes that the consumer has to forego, in order to get an additional banana, her total utility level being the same, is called the marginal rate of substitution (MRS). In other words, MRS is simply the rate at which the consumer will substitute bananas for mangoes so that her total utility remains constant. So, MRS YX = |ΔY / ΔX|.
One can notice that, in Table 2.2, as we increase the quantity of bananas, the quantity of mangoes sacrificed for each additional banana declines. In other words, MRS diminishes with an increase in the number of bananas. As the number
As the number of bananas with the consumer increases, the marginal utility derived from each additional banana falls. Similarly, with the fall in the quantity of mangoes, the marginal utility derived from mangoes increases. So, with an increase in the number of bananas, the consumer will feel the inclination to sacrifice smaller and smaller amounts of mangoes
.Theory of Consumer Behaviour class 11 This tendency for the MRS to fall with an increase in the quantity of bananas is known as the Law of Diminishing Marginal Rate of Substitution. This can be seen in Figure 2.3 also. Going from point A to point B, the consumer sacrifices 3 mangoes for 1 banana, going from point B to point C, the
consumer sacrifices 2 mangoes for 1 banana, and going from point C to point D, the consumer sacrifices just 1 mango for 1 banana. Thus, it is clear that the consumer sacrifices smaller and smaller quantities of mangoes for each additional banana.
Shape of an Indifference Curve
It may be mentioned that the Law of Diminishing Marginal Rate of Substitution causes an indifference curve to be convex to the origin. This is the most common shape of an indifference curve. But in the case of goods being perfect substitutes, the marginal rate of substitution does not diminish. It remains the same. Let’s take an example.
Here, the consumer is indifferent to all these combinations as long as the total of five rupee coins and five rupee notes remains the same. For the consumer, it hardly matters whether she gets a five rupee coin or a five rupee note.
Theory of Consumer Behaviour class 11 So, irrespective of how many five rupee notes she has, the consumer will sacrifice only one five rupee coin for a five rupee note. So these two commodities are perfect substitutes for the consumer and the indifference curve depicting these will be a straight line.
In Figure 2.4, it can be seen that the consumer sacrifices the same number of five-rupee coins each time he has an additional five-rupee note.
Indifference Map
The consumer’s preferences over all the bundles can be represented by a family of indifference curves as shown in Figure 2.5. This is called an indifference map of the consumer. All points on an indifference curve represent bundles that are considered indifferent by the consumer.
Monotonicity of preferences implies that between any two indifference curves, the bundles on the one that lies above are preferred to the bundles on the one that lies below.
Features of Indifference Curve
- Indifference curve slopes downwards from left to right: An indifference curve slopes downwards from left to right, which means that in order to have more bananas, the consumer has to forego some mangoes. If the consumer does not forego some mangoes with an increase in the number of bananas, it will mean the consumer has more bananas with the same number of mangoes, taking her to a higher indifference curve. Thus, as long as the consumer is on the same indifference curve, an increase in bananas must be compensated by a fall in the quantity of mangoes.
Theory of Consumer Behaviour class 11 Notes
Cardinal Utility Analysis:
- Utility can be expressed in numbers.
- Measures: Total Utility (TU) and Marginal Utility (MU).
- Law of Diminishing Marginal Utility: MU diminishes as consumption increases.
Ordinal Utility Analysis:
- Utility is not quantified; instead, preferences are ranked.
- Indifference curves depict bundles that provide equal satisfaction.
- Marginal Rate of Substitution (MRS) measures the rate at which a consumer substitutes one good for another while maintaining the same utility level.
Indifference Map:
- Represents a family of indifference curves.
- Higher curves denote preferred bundles.
Features of Indifference Curve:
- Slopes downwards from left to right.
- Reflects trade-offs between goods; more of one means less of another to maintain utility.