This document provides information about consumer behavior and demand analysis. It defines key concepts like utility, total utility, marginal utility, law of diminishing marginal utility, and law of equi-marginal utility. It explains how consumers aim to maximize total utility given budget constraints. Indifference curves and marginal rate of substitution are introduced to graphically represent consumer preferences. Consumer equilibrium occurs where the budget line is tangent to the highest indifference curve, allowing consumers to obtain maximum satisfaction from their income.

2. COURSE: BBA
SUBJECT: BUSINESS
ECONOMICS
UNIT: 3
Consumer Behavior and Demand Analysis

4. Consumer Behaviour
 Consumer behavior is the study of
individuals, groups, or organizations and the
processes they use to select, secure, and
dispose of products, services, experiences, or
ideas to satisfy needs and the impacts that
these processes have on the consumer and
society

5. Utility
 Utility is a measure of satisfaction, referring to
the total satisfaction received by a consumer
from consuming a good or service
 Utility represents the advantage or fulfillment a
person receives from consuming a good or
service.
 Utility, then, explains how individuals and
economies aim to gain optimal satisfaction in
dealing with scarcity.

6. Total Utility
 The sum total of satisfaction which a consumer receives by
consuming the various unity of the commodity.
 (The more unit of a commodity he consumes, the greater
will be his total utility)
 The overall amount of satisfaction achieved by a
consumer due to the purchase and use of a particular item
or service.
 Consumers theoretically wish to obtain the
maximum degree of total utility for the amount of money that
they expend on an item or service offered by a business.

7. Marginal Utility
 The concept of marginal utility grew out of attempts by
economists to explain the determination of price.
 Marginal utility can be defined as a measure of relative
satisfaction gained or lost from an increase or decrease in
the consumption of that good or service.
 An increase in an activity's overall benefit that is caused by
a unit increase in the level of that activity, all
other factors remaining constant.
 Also called marginal benefit.
 Marginal utility= C hange in total utility
Change in quantity consumed

8. Utility is based on following
Assumptions
1. Cardinal Measurability
 Utility can be measured in terms of money
 Unit is utils

9. 2. Utilities from different goods are Independent
from each other
 Individual utility for goods
 Sum of individual utility is total utility
3. Constancy of marginal utility of money
 Marginal utility of money is constant
4. Introspective Method
We can inspect other’s mind
Guesswork based on our own experience

10. Law of Diminishing Marginal
Utility
The law of diminishing marginal utility states that
‘as a consumer consumes more and more
units of a specific commodity,
utility from the successive units
goes on diminishing’.
 Mr. H. Gossen, a German economist, was the
first to explain this Law in 1854.

11. Law of Diminishing Marginal
Utility
 Law based upon following assumptions
1. The units of the good, which are consumed, are
homogeneous
2. The good is consumed within a short time without
any gaps
3. The units of the good consumed are of a standard size
4. The consumer’s income does not change in the
period of observations
5. There is no change in the tastes of the consumers.

12. 12

13. 13
1 ICE CREAM =
ECSTATIC

14. 14
2nd ICE CREAM = STILL
ECSTATIC

15. 15
3rd ICE CREAM = VERY HAPPY

16. 16
4th ICE CREAM = HAPPY

17. 17
5th ICE CREAM = STILL HAPPY

18. 18
6th ICE CREAM = NOT SO
HAPPY

19. 19
7th ICE CREAM = UNHAPPY

20. 20
8th ICE CREAM = SICK

21. Units Total Utility Marginal Utility
1st ice cream 20 20
2nd ice cream 32 12
3rd ice cream 40 8
4th ice cream 44 4
5th ice cream 45 1
6th ice cream 45 0 21

22. 0
10
20
30
40
50
1 2 3 4 5 6 7 8
Total utility
Total utility
22-20
-10
0
10
20
30
1 2 3 4 5 6 7 8
Marginal utility
Marginal
utility

23. 23
* Limitations/Exceptions
(i) Case of intoxicants: The more a person drinks liquor, the
more s/he likes it.
(ii) Rare collection: If there are only two diamonds in the world,
the possession of 2nd diamond will push up the marginal
utility.
(iii) Application to money: It is true that more money the man
has, the greedier he is to get additional units of it. However,
the truth is that the marginal utility of money declines with
richness but never falls to zero.
Conclusion
*we can say that the law of diminishing utility, like other laws of
Economics, is simply a statement of tendency. It holds good,
provided other factors remain constant.

24.  The law of equi marginal utility explains as to how
a consumer distributes his limited income for
buying different goods and services
 He will spend his income in such away that the
last rupee spent on each of the commodity gives
him the same marginal utility.
 Therefore, this law is known as the Law of Equi-
Marginal Utility
24

25.  To get maximum satisfaction out of his
limited income, the consumer carefully
weighs the satisfaction obtained from each
rupee that he spends. If he thinks that a
rupee spent on one good has greater utility
than spending it on another good, he will
go on spend his money on the former till
the satisfaction derived from the last rupee
spent in the two cases equal
25

26. 26
* Assumptions of the Law:
1.The utility is cardinally measurable.
2. The marginal utility of money remains constant.
3. Consumer has a limited amount of income and he
spends the entire amount.
4. The wants and habits of the consumer remain
constant.
5. The consumer is rational. He tries to get maximum
satisfaction.
6. The consumer spends his income in small
quantities while purchasing the commodities.

27. We assume that:
1. The consumer has Rs.24 with
him.
2. He has to spend his income on
two goods X and Y.
3. The price of each good is Rs.2
and 3 per unit respectively
27

28. 28
Units MU of X(Price
is Rs.2)
MU of Y(Price
is Rs. 3)
1 20 24
2 18 21
3 16 18
4 14 15
5 12 9
6 10 3

29. 29
Units MUx/Px MUy/Py
1 10 8
2 9 7
3 8 6
4 7 5
5 6 3
6 5 1

30.  Approach by R.G.D. Allen and J.R.Hicks
 Consumer can only rank or order the utilities
obtained from a good
 Provided Indifference curve
30

31.  The consumer’s preferences allow him to choose
among different bundles of Pepsi and pizza. If you
offer the consumer two different bundles, he chooses
the bundle that best suits his tastes. If the two bundles
suit his tastes equally well, we say that the consumer is
indifferent between the two bundles.
 Just as we have represented the consumer’s budget
constraint graphically, we can also represent his
preferences graphically. We do this with indifference
curves.
 An indifference curve shows the bundles of
consumption that make the consumer equally happy.
In this case, the indifference curves show the
combinations of Pepsi and pizza with which the
consumer is equally satisfied.

33.  Figure 21-2 shows two of the consumer’s many
indifference curves. The consumer is indifferent
among combinations A, B, and C, because they
are all on the same curve.
 Not surprisingly, if the consumer’s consumption
of pizza is reduced, say from point A to point B,
consumption of Pepsi must increase to keep him
equally happy.
 If consumption of pizza is reduced again, from
point B to point C, the amount of Pepsi
consumed must increase yet again.

34.  A set of indifference curves represents an
indifference map

35.  The slope at any point on an indifference curve equals the rate at
which the consumer is willing to substitute one good for the
other.
 This rate is called the marginal rate of substitution (MRS). In this
case, the marginal rate of substitution measures how much Pepsi
the consumer requires in order to be compensated for a one-unit
reduction in pizza consumption.
 Notice that because the indifference curves are not straight lines,
the marginal rate of substitution is not the same at all
 points on a given indifference curve.
 The rate at which a consumer is willing to trade one good for the
other depends on the amounts of the goods he is already
consuming.
 That is, the rate at which a consumer is willing to trade pizza for
Pepsi depends on whether he is more hungry or more thirsty,
which in turn depends on how much pizza and Pepsi he has.

36.  Marginal Rate of Substitution (MRS) is the rate
at which the consumer is prepared to
exchange goods X and Y
Combination
of goods x and
y
Quantity of
good x(Qx)
Quantity of
good y(Qy)
MRS
A 1 13
B 2 9 4
C 3 6 3
D 4 4 2
E 5 3 1

37. X
Y
MUY
MRS
X MU

  


38.  Indifference curves slope downward to the
right
 Indifference curves are always convex to the
origin
 Indifference curves can never intersect each
other
 A higher indifference curve represents a
higher level of satisfaction than the lower
indifference curve

39. Qx
Qy
IC1

40. Qx
Qy
IC1
IC2
B
A

41.  "The term consumer’s equilibrium refers to
the amount of goods and services which the
consumer may buy in the market given his
income and given prices of goods in the
market, that give maximum satisfaction to
consumer".
 The aim of the consumer is to get maximum
satisfaction from his money income. Given
the price line or budget line and
the indifference map