Theory of Consumer Behaviour - NCERT Notes UPSC

Important terms related to Consumer Behaviour

Utility

• Utility of a commodity is its want satisfying capacity. A consumer usually decides his demand for a commodity on the basis of utility (or satisfaction) that he derives from it. 
• The more the need of a commodity or the stronger the desire to have it, the greater is the utility derived from the commodity. 
• Utility is subjective. Different individuals can get different levels of utility from the same commodity.
• Total Utility: Total satisfaction derived from consuming the given amount of some commodity.

Marginal Utility 

• It is the change in total utility due to consumption of one additional unit of a commodity.
• Total utility can be derived from marginal utility. Total utility is the sum of marginal utility of number of commodities consumed.
• The marginal utility diminishes with increase in 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.

Law of Diminishing Marginal Utility

• It states that marginal utility from consuming each additional unit of a commodity declines as its consumption increases, while keeping consumption of other commodities constant.
• Marginal utility (MU) becomes zero at a level when total utility (TU) remains constant. In the example, TU does not change at 5^th unit of consumption and therefore MU5 = 0. Thereafter, TU starts falling and MU becomes negative.

Diminishing marginal utility curve

Indifference Curve

• An indifference curve is a graph which shows combination of two goods that give the consumer equal satisfaction and utility. 
• Quantitative measure of utility is difficult.  At the most, it can be ranked in terms of having more or less utility in various alternative combinations of goods consumed. 
• The indifference curve joins all points representing the different bundles of goods, in which the consumer is indifferent that is the total Utility derived from each combination is the same.
• Indifference curve slopes downward.    
• Higher indifference curve gives greater level of utility.
• Two indifference curves never intersect each other.

Indifference curve

Marginal rate of Substitution

• It is defined as the rate at which a consumer is ready to exchange one good for another at the same level of utility. 
• It is used to analyse the indifference curve. 

Also read : Constitution of India

Demand

The quantity of a commodity that a consumer is willing to buy and is able to afford, given prices of goods and consumer’s tastes and preferences is called demand for the commodity.

Whenever one or more of these variables change, the quantity of the good chosen by the consumer is likely to change as well. 

Understand the topic better with a related video on Consumer Price Index by Vivek Singh Sir, our faculty for Economy:

Demand Curve and the Law of Demand

• The demand curve is a relation between the quantity of good chosen by a consumer and the price of the good. It shows the quantity demanded by the consumer at each price. 
• The amount of a good that the consumer optimally chooses, becomes entirely dependent on its price, if the prices of other goods, the consumer’s income and her tastes and preferences remain unchanged.  
• The relation between the consumer’s optimal choice of the quantity of a good and its price is very important, and this relation is called the demand function.

Demand Curve

• The Law of Demand states that when price of the commodity increases, demand for it falls and when price of the commodity decreases, demand for it rises, other factors such as consumer taste and preferences, income, etc remaining the same. The law of demand signifies that there is a negative relationship between the demand for a commodity and its price. 

The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good. Goods can be further classified into:

• Normal Goods: For most of the goods, the quantity that a consumer chooses to consume increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods.  The demand for a normal good, moves in the same direction as the consumer’s income. 
• Inferior Goods: For Items like low quality food, coarse cereals etc. the demand for them decreases as the income of the consumer increases, due to now attained better affordability. Demand for an Inferior Good moves in the opposite direction of the income of the consumer.

• Giffen Goods: It refers to a good that people consume more of as the price rises. The demand for such a good can be inversely or positively related to its price. If the good can easily be substituted then the demand would remain inversely related, however in a scenario where substitution cannot work in line with income change, the demand of such a good would be positively related to its price.
• Complementary Goods:  These are those goods which are used together, in compliment to each other like Tea and Sugar. Here, the demand for a good move in the opposite direction of the price of its complementary goods. The increase in price of tea may reduce the demand for sugar as well.  

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Elasticity of Demand 

• Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price. It is defined as the percentage change in demand for the good divided by the percentage change in its price. 
• When the percentage change in quantity demanded is less than the percentage change in market price, the demand for the good is said to be inelastic at that price. Demand for essential goods is often found to be inelastic.
• When the percentage change in quantity demanded is more than the percentage change in market price, the demand is said to be highly responsive to changes in market price. The demand for the good is said to be elastic at that price.  Demand for luxury goods is often found to be elastic.
• When the percentage change in quantity demanded equals the percentage change in its market price, the demand for the good is said to be Unitary-elastic at that price.

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