Theories of Consumer Behavior in Marketing Management
Theory of Consumer Behaviour
What does the term utility mean to you? In economic terms, it means satisfaction. In economics, we address problems by thinking of how they will satisfy human wants. We can examine the concept to appreciate the dynamics of human needs and their satisfaction. The theory of consumer demand as built by Marshal and others is based on the idea that utility is measurable and additive. It’s expressed in hypothetical units called utils. Let’s examine how consumers behave toward achieving satisfaction. How do they behave when satisfied, when over satisfied and when empty? This is what the theory of consumer behaviour addresses.
Total Utility Vs Marginal Utility
Let’s observe the relation between Total Utility and Marginal Utility.
Units of Yams TU in Utils MU in Utils
0 0 0
1 30 30
2 45 15
3 55 10
4 60 5
5 60 0
6 45 -5
7 35 -10
- The 1st yam is the best since by consuming it, the consumer gets the highest satisfaction (utility) – 30 utils.
- 2nd yam is the 2nd best with lesser achievement than the 1st and therefore 15utils.
- Total utility is the sum total of services obtained by consumer for different units of commodity.
- The total utility of 2nd yam is 45 = (30 + 15) utils.
- Marginal utility the addition made to total utility by having an additional unit of commodity.
- Total utility of 2nd yam is 45 utils. When consumer consumes the 3rd yam, the overall utility becomes 55 utils.
- Marginal utility of 3rd yam is 10 utils (55 – 45).
- Marginal utility of a commodity is loss in utility if one unit less is consumed.
- As total utility goes up the marginal utility goes down until 4 units.
- 5th unit is the point of satisfaction.
- The utility is the maximum at the 5th unit and at the same time marginal utility is (0)zero. Beyond the 5th unit, we have disutility.
- When overall utility is going down, marginal utility will be negative (6 and 7th Units.)
Indifference Curve Analysis
We can further understand the concept of utility by understanding the concept of Indifference Curve Analysis. Indifference curve analysis measures utility. It explains consumer behaviour in terms of his preferences of two goods, say X & Y.
Below is the imaginary in -difference schedules representing the variances combination of goods represented by X and also Y.
Combination X Y
1 1 18
2 2 13
3 3 9
4 4 6
5 5 4
6 6 3
Indifference curve shows the satisfaction obtained by consuming different combinations of the two goods. The achievement is the same in all points of the curve, but the combinations are many making the locus to be high at one end and low in another. One indifference curve alarms only one(1) level of satisfaction. In the diagram below, the further the curves are away from origin; they represent higher level of satisfaction as they have larger combination of X , Y.
14 indicate a higher level of satisfaction than 13. 13 is indicative of a higher level of satisfaction than 12, and so on. Consumes would prefer to move in the direction indicated by the arrow in the figure.
The diagram is an indifference curve map.
Assumptions of indifference curves
1. The consumer acts rationally to maximum satisfaction.
2. There are two goods X and Y.
3. Consumer possesses complete information about prices of goods in the market.
4. Prices of the goods are given.
5. Consumer tastes and habits remain the same.
You have come across the concept of equilibrium in the previous chapters. Let’s understand the concept of Consumer Equilibrium.
. Consumer is in “equilibrium” … when his.. budget line … (PQ) .. is -tangent… to an indifference curve. ….PQ is tangent… to curve I1 at R. PQ is the budget line. It shows the combination of the good he can have with a given income.
Given the tastes and preferences of the consumer and the prices of the two goods, if the income of the consumer changes, the effect it will have on his purchases is known as the income effect. If the incomes of the consumer increase, the budget line will shift upwards to the right parallel to the original budget line. A fall in income in budget line will shift upwards to the right, parallel to the original budget line. We can analyze this concept graphically to understand consumer equilibrium in the face of changing income better.
The consumer buys RA of Y and OA of X at the consumer equilibrium point on the budget line -PQ.
As the consumer income rises, he purchase SB of Y and -0B- of X at the equilibriumpoint of P1Q1. The curve connecting the locus of this equilibriums point is called - Income Consumption Curve or just ICC slopes upwards to the right. It indicates the income effects of on X and Y.
Unlike in income effect, the budget line will be fanning out from P and is a tangent to an indifference curve 12.