Categories: MUMBAI UNIVERSITY IDOL NOTES

Consumer’s Behaviour

Consumer's Behaviour

Hey Mumbai University FYBA IDOL students! Today, we dive into the world of Micro – Economics, focusing on-“Consumer’s Behaviour”. we’re into the fundamental concepts that underpin how consumers make choices and allocate their resources. So, let’s dive right in and see what’s on the agenda for today’s session!

First up, we’ll unravel the concept of utility. What exactly is utility, and how does it drive consumer decision-making? Get ready to explore the satisfaction or happiness that individuals derive from consuming goods and services. But hold on tight, because we’ll distinguish between cardinal and ordinal measurement of utility. How do we quantify utility, and what are the differences between these two approaches? Get ready to explore the nuances of measuring consumer satisfaction.

Now, let’s zoom in on the law of equi-marginal utility. What does it tell us about how consumers allocate their resources to maximize satisfaction? Get ready to uncover the principle of balancing marginal utility across different goods and services. But that’s not all! We’ll also explore the concept of a demand function. How do we express the relationship between price and quantity demanded mathematically? Get ready to dive into the equations that help us understand consumer behavior.

Now, let’s shift gears and explore how consumer surplus can be measured. What is consumer surplus, and how does it represent the difference between what consumers are willing to pay and what they actually pay? Get ready to explore the concept of consumer welfare. But wait, there’s more! We’ll also delve into the concept of cardinal utility analysis. What is it, and how does it differ from other approaches to measuring utility? Get ready to explore the strengths and limitations of this framework.

Now, let’s explore the concept of consumer surplus and its uses. How does consumer surplus reflect the benefit consumers receive from purchasing goods and services at a price lower than what they are willing to pay? Get ready to uncover the economic significance of consumer welfare. So, FYBA IDOL Mumbai University students, get ready to learn about –“Consumer’s Behaviour” with customized idol notes just for you. Let’s jump into this exploration together

Question 1 - What is utility?

Utility refers to the satisfaction or pleasure that a consumer derives from consuming a good or service. It is a subjective concept that varies from person to person and from situation to situation. In economics, utility is used to measure the level of satisfaction or benefit that individuals gain from the consumption of goods and services. The concept of utility is essential in understanding consumer behavior and decision-making processes

Question 2 - Distinguish between cardinal and ordinal measurement of utility

Introduction:

Imagine you’re trying to decide between two delicious ice cream flavors—chocolate and vanilla. You know you like chocolate a lot more, but how do you measure just how much more you like it? Well, economists have come up with two ways to understand and measure this kind of satisfaction—cardinal and ordinal measurement of utility. Let’s explore these two approaches in simple terms to understand how they help us make sense of our preferences.

Cardinal Measurement of Utility:

- Think of cardinal utility like a ruler for your happiness. With cardinal measurement, economists try to put a number on how much joy or satisfaction you get from consuming something. It’s like saying, “I get 10 units of happiness from eating chocolate and only 5 units from eating vanilla.”
- This approach was popular with older economists who believed that happiness could be measured with absolute numbers, kind of like how we measure weight or temperature. They thought it was possible to say exactly how much satisfaction you get from each bite of ice cream.
- And just like you can add up the lengths of different objects on a ruler, economists believed you could add up the happiness from different things you consume to get a total amount of happiness. They also looked at how much extra happiness you get from each additional bite—kind of like measuring the slope of a hill.
Ordinal Measurement of Utility:
- Now, ordinal utility is a bit different. It’s like saying, “I like chocolate more than vanilla, but I can’t put a number on exactly how much more.” Instead of measuring happiness with numbers, ordinal measurement ranks your preferences. It’s like saying, “Chocolate is my favorite, then comes vanilla, and strawberry is my least favorite.”
- This approach became more popular with modern economists who realized that measuring happiness with exact numbers might not be so simple. Instead, they focused on comparing preferences and figuring out what people like best, second best, and so on.
- With ordinal measurement, you can’t add up happiness like you would with numbers. Instead, you just know which option you prefer over another. It’s like knowing that chocolate is better than vanilla, but not by exactly how much.

Conclusion:

In the end, cardinal and ordinal measurement of utility help us understand how people make choices and what they prefer. Cardinal measurement tries to put a number on happiness, while ordinal measurement focuses on ranking preferences. Both approaches have their strengths and weaknesses, but together, they help us unravel the mysteries of why we choose one thing over another—whether it’s ice cream flavors or anything else!

Question 3 - What is the law of Equi-marginal utility?

Introduction:

Think about the last time you went grocery shopping with a limited amount of money. How did you decide what to buy? The Law of Equi-marginal Utility can help us understand this decision-making process. It’s like a guide that consumers use to get the most satisfaction out of their limited budgets. Let’s delve into this concept in simpler terms to see how it works.

Consumer Equilibrium: Imagine you have $20 to spend on snacks, and you’re trying to decide between buying chips and buying cookies. The Law of Equi-marginal Utility says you’ll reach a balance, or equilibrium, when the extra happiness you get from spending one more dollar on chips is the same as the extra happiness you get from spending one more dollar on cookies. In other words, you’re getting the most bang for your buck.
Optimal Allocation: When you reach this equilibrium, you’re making the best use of your money. You’re getting the most satisfaction possible from your purchases because you’re spending your money where it makes the most difference. So, if you’re getting more happiness from spending your last dollar on cookies than on chips, you’ll buy more cookies until the satisfaction levels out.
Mathematical Representation: Now, there’s a fancy equation to represent this balance. It looks like this: MUa/Pa = MUb/Pb = MUm. Don’t let the symbols scare you! MUa and MUb are just how much extra happiness you get from each snack, and Pa and Pb are their prices. MUm is how much extra happiness you get from spending one more dollar in general. When all these ratios are equal, you’ve found your equilibrium.
Practical Application: This law helps us understand why people buy what they do. It’s not just about the price—it’s about the happiness you get from each purchase. So, if chips are on sale but you really love cookies, you might still choose cookies because they give you more joy for your money. It’s all about maximizing your satisfaction!

Conclusion:

The Law of Equi-marginal Utility might sound complicated, but it’s just a fancy way of saying that people want to get the most happiness out of their money. By balancing their spending on different goods, consumers can make sure they’re getting the most bang for their buck and maximizing their satisfaction. So, next time you’re faced with a choice at the store, remember this law—it might just help you make the best decision!

Question 4 - What is a demand function?

Introduction:

Imagine you’re trying to figure out how many chocolate bars people will buy at a store. But there’s a catch—how much they buy depends on a bunch of different things, like the price, how much money they have, and even what other snacks are available. That’s where a demand function comes in handy. It’s like a magic formula that helps us understand how all these factors affect how much people want to buy.

Mathematical Representation: So, what exactly is a demand function? Well, it’s basically a fancy equation that looks like this: Qd = f(P, Y, Pr, T, …). Don’t let the symbols scare you! Qd stands for the quantity demanded (or how many chocolate bars people want to buy), and P is the price of the chocolate bars. Y represents how much money people have to spend (their income), Pr is the price of other snacks (like candy), and T is their preferences. The dots mean there could be even more factors involved!
Inverse Relationship: Now, here’s the cool part: when the price of chocolate bars goes up, people usually buy less of them. It’s like when the price of a video game goes up, you might decide to wait until it’s on sale to buy it. This idea is called the law of demand, and it’s one of the main things the demand function helps us understand.
Determinants of Demand: The demand function isn’t just about the price, though. It also looks at other stuff, like how much money people have to spend and whether there are other snacks they might like better. For example, if the price of candy goes down, people might buy more candy instead of chocolate bars. The demand function helps us see how all these factors work together to affect how much people buy.
Use in Analysis: Economists use demand functions to figure out all kinds of things. They can predict how changes in prices or incomes might affect sales, which helps businesses decide how much stuff to make and how to price it. It’s like having a crystal ball that tells you what people will buy and why!

Conclusion:

So, the demand function is like a secret code that helps us unlock the mysteries of consumer behavior. By looking at factors like price, income, and preferences, we can understand why people buy what they do and make smarter decisions about how to run businesses and manage the economy. It’s a powerful tool that helps us make sense of the complex world of buying and selling.

Question 5 - How Consumer surplus can be measured

Introduction:

Consumer surplus might sound like a complicated term, but it’s actually pretty simple once you break it down. It’s all about the extra happiness or satisfaction that we, as consumers, get from buying something, compared to what we actually have to pay for it. In economics, understanding consumer surplus helps us see how much people really value the things they buy, and how this can affect pricing and policies.

Graphical Method: Picture this: you’re at a store, and you’re willing to pay $10 for a cool new gadget. But guess what? The store is selling it for only $5! That extra $5 of value you’re getting is your consumer surplus. On a graph, it’s like a triangle between the price you’re willing to pay and the actual price you pay. Pretty neat, right?
Mathematical Method: Now, if you’re more of a numbers person, don’t worry—we can crunch some numbers too. We can calculate consumer surplus by finding the area under the demand curve (which shows how much people are willing to pay) and above the price line (which shows how much they actually pay). Basically, it’s the difference between what people are willing to pay and what they actually pay.
Using Marginal Utility and Price Data: Okay, let’s try a different approach. Imagine you’re buying slices of pizza. With each slice, you’re getting more and more full, so the extra satisfaction you get from each slice (that’s called marginal utility) starts to decrease. If the price of each slice is less than the satisfaction you’re getting from it, that’s your consumer surplus!
Application in Policy and Pricing: So, why does consumer surplus matter? Well, for one thing, it helps governments and businesses understand how happy people are with the stuff they buy. This can help them make decisions about things like taxes or pricing. If they can figure out how to give people more value for their money, everyone wins!

Conclusion:

Consumer surplus might seem like a fancy term, but it’s really just about how much extra joy or satisfaction we get from the things we buy. Whether it’s represented on a graph, calculated with math, or estimated using fancy economic terms, it’s all about making sure we’re getting the most bang for our buck. Understanding consumer surplus helps us see the real value of the things we buy and how this affects the decisions we make as consumers and the policies that shape our economy.

EXERCISE QUESTIONS :-

Question 1 - Explain the concept of cardinal utility analysis. What are its main limitations?

Introduction:

Cardinal utility analysis might sound complicated, but it’s essentially about putting numbers to how much happiness or satisfaction we get from the things we buy. This approach, pioneered by economists like Alfred Marshall, tries to measure utility—the satisfaction we get from consuming goods and services—in precise numerical terms called utils. While it has its strengths, there are also some limitations to consider.

Concept of Cardinal Utility Analysis: Cardinal utility analysis is like giving a score to how much we like something. For example, if you really love pizza, you might give it a high score of, say, 100 utils, while broccoli might only get a score of 20 utils. This allows us to compare how much satisfaction we get from different things in a concrete way.
Limitations of Cardinal Utility Analysis:
- Subjectivity of Utility: The tricky part is that utility is different for everyone. What makes you happy might not make someone else happy, so it’s hard to measure utility in an objective way.
- Interdependence of Goods: Cardinal utility analysis assumes that the happiness you get from one thing doesn’t depend on other things you consume. But in reality, if you love peanut butter, you might also love jelly, so their utilities are connected.
- Constant Marginal Utility of Money: Cardinal utility analysis also assumes that the happiness you get from spending money stays the same, no matter how much you spend. But as you buy more things, the happiness you get from each extra dollar might decrease.
- Inability to Explain Income and Substitution Effects: Lastly, cardinal utility analysis struggles to explain how changes in prices or income affect what we buy. For example, if the price of pizza goes up, we might buy less pizza but more burgers instead. Cardinal utility analysis doesn’t fully capture these kinds of changes.

Conclusion:

Cardinal utility analysis is a useful tool for putting a number on the satisfaction we get from consuming goods and services. However, it has its limitations, like the subjective nature of utility, the interdependence of goods, assumptions about money, and its inability to explain complex consumer behavior. Despite these drawbacks, cardinal utility analysis has paved the way for understanding consumer preferences, but it’s important to consider other approaches like ordinal utility analysis to get a more complete picture.

Question 2 - Explain the concept of consumer’s surplus and its uses

Introduction:

Consumer’s surplus might sound like a fancy term, but it’s actually a simple concept that’s really important in economics. It’s all about the extra happiness or satisfaction we get when we buy something for less than we’re willing to pay. Let’s dive into what consumer’s surplus is and why it matters.

Concept of Consumer’s Surplus:

- Imagine you really want to buy a new phone, and you’re willing to pay $800 for it. But guess what? You find a deal and buy it for only $600. That extra $200 of happiness you feel because you got a good deal—that’s your consumer’s surplus.
- It’s like getting a bonus of satisfaction because you paid less than what you were ready to spend. In economics lingo, it’s the difference between what you’re willing to pay and what you actually pay.
- We can even draw a little graph to show it. The area between the price you pay and the demand curve—that’s your consumer’s surplus.
Uses of Consumer’s Surplus:
- Policy Implications: Governments use consumer’s surplus to see how different rules, like taxes or subsidies, affect us. They want to make sure we’re still happy with what we buy.
- Price Determination: Companies use consumer’s surplus to figure out how to price things. They want to make sure we’re getting good deals while still making money.
- Public Utilities Pricing: It’s not just about phones and gadgets. Even things like water and electricity use consumer’s surplus to decide prices. They want to make sure everyone can afford these important things.
- Taxation Analysis: When governments decide on taxes, they look at consumer’s surplus to make sure they’re not making us too unhappy by paying more.
- Understanding Consumer Behavior: Finally, it helps us understand why we buy what we buy. We’re always looking for the best deals to get the most happiness out of our money.

Conclusion:

Consumer’s surplus is like a little bonus of happiness we get when we find a good deal. It’s a simple but powerful concept in economics that helps us understand how happy we are with what we buy. Governments, companies, and even utilities use it to make sure we’re getting the best bang for our buck. So, next time you snag a great deal, remember—it’s not just about saving money; it’s about getting that extra bit of happiness too!

IMPORTANT QUESTIONS :-

What is utility?
Distinguish between cardinal and ordinal measurement of utility
What is the law of Equi-marginal utility?
Explain the concept of cardinal utility analysis. What are its main limitations?

Important Note for Students:- These questions are crucial for your preparation, offering insights into exam patterns. Yet, remember to explore beyond for a comprehensive understanding.

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