Consumer Behaviour

NODE 01

The Consumer

• Person/household purchasing goods.
• Purpose: satisfy wants.
• Faces unlimited wants + limited income.
• Choices must be made.

NODE 02

Consumption

• Using goods/services to satisfy wants.
• Food → satisfies hunger.
• Transport → satisfies mobility.
• Provides direct satisfaction.

NODE 03

Utility

• Satisfaction derived from consumption.
• Not necessarily the same as usefulness.
• Subjective valuation by the consumer.

NODE 04

Total Utility

• Total satisfaction from consuming a quantity.
• Continues to rise initially.
• Even while additional satisfaction falls.

NODE 05

Marginal Utility

• Additional utility from one extra unit.
• MU = Change in TU ÷ Change in Qty.
• The increment of satisfaction.

NODE 06

Law of Diminishing MU

↘

• As consumption increases, MU decreases.
• Other things remaining constant.
• E.g., 1st glass of water vs 4th glass.
• Fundamental block of consumer theory.

NODE 07

TU & MU Relationship

• MU > 0 → TU rises.
• MU = 0 → TU is maximum.
• MU < 0 → TU falls.
• Crucial for equilibrium.

NODE 08

Consumer Preferences

>

• Ranking combinations of goods.
• Bundle A > Bundle B (Preferred).
• Bundle A ~ Bundle B (Indifferent).

NODE 09

Rational Consumer

🧠

• Chooses most preferred affordable bundle.
• Given preferences, income, and prices.
• Constraint: Wants ↔ Affordability.

NODE 10

Budget & Income

• Consumer has limited income (M).
• Cannot buy every possible combination.
• Budget set = collection of affordable bundles.

NODE 11

Budget Constraint

X

• Limit imposed by income and prices.
• PxX + PyY ≤ M.
• Cannot spend more than available income.

NODE 12

Budget Line

• Combinations that use ENTIRE income.
• PxX + PyY = M.
• Downward sloping (trade-off required).

NODE 13

Effect of Income Change

↗

• Prices unchanged, Income increases.
• Can afford more combinations.
• Budget line shifts outward (parallel).

NODE 14

Effect of Price Change

↘

• Income and other good's price unchanged.
• Price of one good changes.
• Budget line rotates/pivots on intercept.

NODE 15

Indifference Curve

• Combinations providing the SAME satisfaction.
• Locus of bundles among which consumer is indifferent.

NODE 16

Indifference Map

• Collection of indifference curves.
• Higher curves = preferred bundles.
• Assuming standard monotonic preferences.

NODE 17

Marginal Rate of Substitution

• Amount of Y sacrificed for +1 unit of X.
• While remaining equally satisfied.
• Explains the downward, convex slope.

NODE 18

Properties of ICs

X

• Downward sloping & Convex to origin.
• Non-intersecting.
• Higher curve = higher satisfaction.

NODE 19

Consumer Equilibrium

• Choosing the most preferred affordable bundle.
• Highest attainable IC tangent to Budget Line.
• MRS = Price Ratio (Px / Py).

NODE 20

Utility Approach

• Allocating expenditure across goods.
• To obtain highest attainable utility.
• Matches marginal benefit to price.

NODE 21

Cardinal vs Ordinal

10 UTILS vs A > B

• Cardinal: Utility represented numerically.
• Ordinal: Utility represented by ranking (IC approach).

NODE 22

Consumer Surplus

• Difference between max willingness to pay...
• ...and actual amount paid.
• A measure of net benefit to consumers.

NODE 23

Demand as an Outcome

➔

• Preferences + Income + Prices.
• → Affordable choices → Consumer optimum.
• → Quantity chosen at different prices.

NODE 24

Normal Goods

INC ↑

→

DEM ↑

• Demand rises when consumer income rises.
• Other things equal.
• Includes many ordinary consumption goods.

NODE 25

Inferior Goods

INC ↑

→

DEM ↓

• Demand falls when consumer income rises.
• Consumers shift to preferred alternatives.
• Based on income-demand relation, not quality.

NODE 26

Elasticity of Demand

• Measures responsiveness.
• % change in Qty ÷ % change in Price.
• Measured via percentage, total expenditure, or geometric methods.

NODE 27

Total Expenditure

P×Q=TE

• Total Expenditure = Price × Quantity.
• Relationship between Price changes and TE...
• ...infers the elasticity of demand.

NODE 28

Factors Affecting Choice

• Income, Prices, Preferences.
• Substitute/Complement prices.
• Information, Culture, Advertising.

NODE 29

Real-World Choices

🧠

• Limited info, uncertainty, behavioral biases.
• Habits, social influence, emotions.
• Connects to Behavioral Economics.

NODE 30

The Master Chain

• Wants → Preferences + Limited Income.
• Budget Set → Utility/Preferences.
• Consumer Equilibrium → Quantity Chosen.
• Individual Demand → Market Demand.