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

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.

I am going to market to buy fruits. I want to buy apple and oranges. 1 kg apple costs ₹100 and 1 kg orange costs ₹ 100. I have ₹ 400 in my purse. Help me to find out the bundles that I

can afford to buy .

The bundles that you can

afford tobuy are: