THEORY OF CONSUMER BEHAVIOR FOR CA AND CS FOUNDATION BUSINESS ECONOMICS 1

• THEORY OF CONSUMER BEHAVIOR
  CA AND CS FOUNDATION BUSINESS ECONOMICS
• MEANING OF UTILITY
• THE UTILITY IS TO DENOTE THAT QUALITY IN A COMMODITY OR SERVICES BY VIRTUE OF WHICH OUR WANTS ARE SATISFIED
• WANT SATISFYING POWER OF A GOOD IS CALLED UTILITY.
• ACCORDING HIBBDON,” UTILITY IS THE QUALITY OF A GOOD TO SATISFY A WANT.
• MRS ROBINSON,” UTILITY IS THE QUALITY IN COMMODITY THAT MAKES INDIVIDUAL WANT TO BUY THEM.
• FEATURES

1. UTILITY IS SUBJECTIVE:-BECAUSE IT DEALS WITH THE MENTAL SATISFACTION OF  A MAN. A THING MAY HAVE DIFFERENT UTILITY FOR DIFFERENT PERSONS. LIKE A MAY BE  DERIVING UTILITY FROM TEA BUT B HATES TEA AND GET UTILITY FROM COLD BEVERAGES
2. UTILITY IS RELATIVE:- NEVER REMAIN THE SAME. IN SUMMER WE GET UTILITY FROM AC BUT IN WINTER WE GET UTILITY FROM HEATER.
3. UTILITY IS NOT ESSENTIAL USEFUL : A COMMODITY HAVING UTILITY NEED NOT USEFUL.A CHAIN SMOKER DERIVE UTILITY FROM CIGARETTE BUT CONSUMPTION OF CIGARETTE IS INJURIOUS TO HEALTH.
4. UTILITY IS INDEPENDENT OF MORALITY:-UTILITY OF DRUGS MAY NOT BE GOOD FROM THE MORAL POINT OF VIEW BUT STILL THEY SATISFY THE DEMAND OF DRUG TAKERS.
5. FEATURES
6. UTILITY IS DIFFERENT FROM SATISFACTION:-IT IS THE QUANTITY OF GOOD THAT SATISFIES OUR WANT. ONE GETS SATISFACTION AFTER ONE’S WANT IS FULFILLED. UTILITY IS THE CAUSE AND SATISFACTION IS THE EFFECT.

• CONCEPTS OF UTILITY
• INITIAL UTILITY:- THE UTILITY IS DERIVED FROM THE FIRST UNIT OF A COMMODITY
• MARGINAL UTILITY:- CHAMPMAN, MARGINAL UTILITY IS THE ADDITION MADE TO TOTAL UTILITY BY CONSUMING ONE MORE UNITS OF COMMODITY
• MU_N=TU_N-TU_N-1
• OR MU=∆TU/∆Q
• MARGINAL UTILITY CAN BE POSITIVE,: WHEN by CONSUMING ADDITIONAL UNITS TU GOES ON INCREASING
• ZERO MU=CAUSES NO CHANGE IN THE TOTAL UTILITY
• NEGATIVE MARGINAL UTILITY:- CAUSES FALL IN TOTAL UTILITY
• TOTAL UTILITY : THE UTILITY DERIVED FROM THE TOTAL NUMBER OF UNITS OF A COMMODITY CONSUMED MU_N=U₁+U_{2------------}            +U_N

• RELATION BETWEEN TOTAL UTILITY AND MARGINAL UTILITY
• JEVONS A NEO CLASSICAL WAS THE FIRST ECONOMISTS TO HIGHLIGHT THE RELATIONSHIP BETWEEN MARGINAL UTILITY AND TOTAL UTILITY
• TOTAL UTILITY IS THE SUMMATION OF MARGINAL UTILITY
• TU _4TH = MU₁ +MU₂+MU₃ +MU₄
• RELATION BETWEEN TOTAL UTILITY AND MARGINAL UTILITY
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• GRAPH
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• SIGNIFICANCE OF THE DIFFERENCE BETWEEN TOTAL AND MARGINAL UTILITY
• PARADOX OF VALUE:-

1. BELIEF OF ECONOMISTS THAT PRICE OF A COMMODITY WAS EQUAL TO TOTAL UTILITY
2. GOODS WHICH GIVE MORE VALUE SHOULD BE PRICED HIGH AND WHICH GIVES LOW VALUE SHOULD BE PRICED LOW BUT NOT IN REAL LIFE
3. WATER IS VERY MUCH ESSENTIAL FOR LIFE AND WE CAN NOT SURVIVE  WITHOUT WATER AND DIAMONDS WHICH ARE NOT AT ALL ESSENTIAL. BUT DIAMONDS ARE VERY EXPENSIVE ,THE PRICE OF WATER IS VERY LOW. WHY THIS HAPPEN. IT IS CALLED PARADOX OF VALUE.
4. THIS PARADOX HAS BEEN EXPLAINED BY JEVONS
5. PRICE IS DETERMINED BY ITS MARGINAL UTILITY AND NOT BY UTILITY. THINGS WHICH ARE AVAILABLE IN ABUNDANCE, WE GET SATURATION POINT SO THEIR UTILITY BECOMES ZERO DIAMONDS ARE VERY RARE SO THEIR TOTAL UTILITY NEVER REACHES ZERO. THEY COMMAND MORE PRICE.

• CONSUMER’S SURPLUS : A CONSUMER IS READY  AND WILLING TO PAY  FOR A COMMODITY MORE THAN ACTUAL PRICE
• THE DIFFERENCE BETWEEN THE PRICE IS HE IS READY TO PAY AND ACTUAL PAY IS CALLED CONSUMER SURPLUS.
• THE CONSUMER IS PREPARED TO PAY THE PRICE EQUIVALENT TO MARGINAL UTILITY OF THE MARGINAL UNIT OF THE COMMODITY.