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Assignment on Consumer Behavior

Submitted by:

Sujeet Kumar

MBA 1st Semester

Roll No. 25

Business Economics (114)

Sujeet Kumar MBA 1st Semester Business Economics

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ASSIGNMENT QUESTION:

State and explain the axiom behind the analysis of consumer’s behavior with suitable

example.

SOLUTION:

Consumers play an important role in determining the demand for a firm’s products.

They are quality conscious and price sensitive. The success of a product is

dependent on the consumer’s acceptance of the product. Price Sensitive customers

like to buy product in small quantities at affordable prices. For example, Indian

electronic products like computer CD, storage devices etc are available at high price

and better quality with service and warranty. On the other hand the same category of

product is available at more cheaper and affordable price in the Gray Market.

Therefore, firms must try to offer products that are of high quality, at affordable

prices. Consumer behavior is an important determinant of the type of product a firm

should produce. Before launching a product a firm has to take into consideration its

target customers tastes and preferences. For example, when Dabur Foods launched

Real orange juice, consumers rejected it because it tasted bitter. Research reveled

that Indian consumers wanted juices to be sweeter. Dabur then modified Real’s taste

by sweetening the orange juice.

Consumer behavior assumes that every individual tries to maximize his satisfaction

by consuming products and services with the limited income available to him at a

particular time. This limited income can also be referred to as the budget constraint.

In economics, consumer behavior theory explains the relationship between changes

in price and consumer demand. Variations in price determine whether a particular

product is in demand or not. If the demand for a product is low in spite of the price

being less, it can be said that consumers are not accepting that product. On the

other hand, if the demand for a particular product is high, then the price of the

product would increase. Hence the manufacturer can determine and fix prices of

their products according to the consumer demand. Thus, consumer behavior plays

an important role for manufacturer’s decision making.

Sujeet Kumar MBA 1st Semester Business Economics

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In more simple terms, “Consumer behavior is the process and activities where

people engage in the searching, selecting, purchase, using, evaluating and

disposal of products and services so as to satisfy their needs and desires.”

Axioms of Consumer Behavior:

Existence of utility:

In economics, the term ‘utility’ is used to denote that quality of a commodity or

services by virtue of which our wants are satisfied. In other words, want

satisfying power of a good is called utility. This is assumed to be measured in

terms of cardinal numbers, such as 1,2,3,4 etc. These numbers are called

Utils or units of utility. Thus, 4 Utils of utility are greater than 3 utils of utility

and so on.

Thus, according to this axiom, utility is the function of satisfaction gained from

the consumption of goods or services. Numerically, it can be expressed as

U = f (x, y)

Where, X and Y are two different goods and x and y are quantity or number of

units of goods X and Y respectively.

E.g. Lets take two substitute goods. i.e. Tea and coffee, where when a

consumer consumes 1 cup of tea and 2 cup of coffee, he gets different level

of satisfaction. In this case, utility function can be shown as

U= f (T, C)

= f (1, 2)

Law of Non-satiety:

The law of non satiety states that the consumer’s satisfaction is immeasurable

and it also focus on the assumption that consumers are not satisfied whether

whatever the number of utils he/she consumes.

The above statement can be expressed numerically as:

MUx = du / dx > 0

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Where, MUx represents Marginal utility of goods X

du / dx represent change in the utils of x.

in the above equation, it represents that, the MU of goods X cant be Zero or it

should be greater than Zero i.e. positive. This is also known as 1 st order

derivative.

E.g. when a hungry man have one piece of bread he gets certain satisfaction

and he will get more or less some level of satisfaction with each unit of further

additional consumption.

Law of Diminishing Marginal Utility:

The law of diminishing marginal utility states that as more and more standard

units of a commodity are continuously consumed, marginal utility derived from

every additional unit must decline. Indeed, it is so very natural to happen in

respect of all goods and services. It is, therefore, called ‘Fundamental law of

Satisfaction’.

Marginal utility refers to additional utility on account of the consumption of an

additional unit of a commodity.

Where in the above Law standard unit of a commodity means a cup of tea,

not a spoon of tea; a glass of milk, not a drop of milk etc should be consumed

at a point of time.

The above law may be expressed numerically as,

{d (du / dx)} / dx < 0

Or, d2U / dx2 < 0

This signifies that Marginal Utility of commodity X should be less than 0 or

can’t be 0 i.e. it should always be negative. The above equation is also known

as 2nd order derivative.

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For e.g. when we consume, two piece of chicken, we get an utils of 4 but

when we consume 6 piece of chicken the utils of 10 is measured. It signifies

that the Marginal utility declines but total utility increases.

This can be shown below in a tabulated form:

Quantity Total Utility Marginal Utility Description0 0 -1 8 8 Initial Utility2 14 6

Positive Utility3 18 44 20 25 20 0 Zero Utility6 18 -2 Negative Utility

Sujeet Kumar MBA 1st Semester Business Economics