Lecture 02 # Consumer Behavior & Its Analysis

Question 1

What is Utility?

Answer 1

UTILITY:​
Utility denotes satisfaction, pleasure or benefit derived by a person from the consumption of their preferred goods or services.​

Question 2

S.I Unit of Utility?

Answer 2

S.I UNIT: Utility is measured in units called Utile/Utils (The Spanish word for useful).​

However, calculating the benefits or satisfaction that consumers receive is abstract and difficult to pinpoint. ​

Question 3

Ways to calculate utility?

Answer 3

There are two ways to calculate utility,​
1. Cardinal Utility
Cardinal utility is measurable. It assigns a numerical value to the exact level of satisfaction / utility.
2. Ordinal Utility
Ordinal utility is not measurable. It does not assign numerical value to the satisfaction / utility.

Question 4

Kinds of Utility?

Answer 4

There are four kinds of utility such as,​
1. Form Utility:​
It refers to the value added by changing the form or shape of a product.​

2. Time Utility:​
   It refers to the value added by making a product or service available at the right time.​
3. Place Utility: ​
   It refers to the value added by making a product or service available at the right place.​
4. Possession Utility: ​
   It refers to the value added by making a product or service easy to purchase or possess.​

Question 5

Key Concepts of Utility?

Answer 5

KEY CONCEPTS:
1. Total Utility:
Total satisfaction a consumer derives from consuming a certain quantity of goods or services.

2. Marginal Utility:
   Satisfaction gained from consuming one more or forgone by consuming one less unit.

Question 6

State Law of Diminishing Marginal Utility.

Answer 6

STATEMENT:​
The law of diminishing marginal utility states that the amount of extra or marginal utility declines as person consumes more and more of good or service.

Question 7

Exceptions of Law of Diminishing Marginal Utility?

Answer 7

Exception include knowledge, information, education, wealth and hobby etc.​

Question 8

List some of the facts regarding Law of Diminishing Marginal Utility.

Answer 8

1. As consumption rises, total utility grows at decreasing rate.
2. Total utility growth slows because marginal utility diminishes.
3. Diminishing marginal utility occurs as more is consumed.
4. As marginal utility falls, total utility rises inversely.
5. When marginal utility zero, total utility is maximum (saturation).
6. Negative marginal utility causes total utility to decrease.
7. Marginal utility curve must always slope downward.
8. Total utility curve appears concave or dome-shaped.
9. Total utility equals sum of marginal utilities consumed.
10. This observation formulated the law of downward-sloping demand.

Question 9

Law of Diminishing Marginal Utility in one simple line?

Answer 9

As consumption rise, TU will grow at slower rate and MU tends to diminish.​

Question 10

What is Equi-Marginal Principle?

Answer 10

The equi-marginal principle states that resources should be allocated so that the marginal benefit per unit of cost is equal across all uses.

Question 11

Formula to calculate Equi-Marginal Utility?

Answer 11

FORMULA:​
MU(a) / P(a) = MU(b) / P(b) ….= MU / P​

Question 12

What is Consumer Equilibrium?

Answer 12

Consumer’s Equilibrium:​
It refers to the point where a consumer maximizes their satisfaction or utility given their budget constraint. ​

Question 13

Consumer Equilibrium occurs where?

Answer 13

The consumer’s equilibrium occurs where the budget line is tangent to the highest possible indifference curve. ​

Question 14

What does that mean that consumer’s equilibrium occurs where the budget line is tangent to the highest possible indifference curve?

Answer 14

This means that the consumer is getting the higher satisfaction possible given their income and the prices of the goods.​

Question 15

What is Indifference Curve?

Answer 15

Indifference Curve which shows the different possible combination of two different goods having different quantity giving equal level of satisfaction. It is also known as ISO-Utility Curve.​

Question 16

Features of Indifference Curve?

Answer 16

Features:
It cannot be a straight line.
It cannot parallel the x-axis or y-axis.
It cannot be concave to the origin.
Two IC’s never intersect due to transitivity assumption.
Higher IC provides higher level of satisfaction.
MRS slopes downward from left to right.
Negative slope of IC shows declining trend.
Increase good X, decrease good Y consumption.
Curve is always convex due to DMRS.

Question 17

What is Indifference Map?

Answer 17

Indifference map is basically presence of two or more IC together.​
It is graphical representation that shows complete picture of consumer preference.​

Question 18

What is IC Analysis?

Answer 18

IC ANALYSIS:
1. IC is a two-dimensional graph with each axis.
2. Each axis represents a single type of goods.
3. Any point on curve gives same satisfaction level.
4. It helps understand consumer choice and behavior.
5. It explains income, price, substitution effect, and utility.
6. Also explains the Marginal Rate of Substitution.

Question 19

ASSUMPTION OF INDIFFERENCE CURVE?

Answer 19

1. Consumer is more satisfied with bundles farther from origin.​
2. With increase in income, consumer would buy more of commodities, resulting in IC shifting up. ​
3. Factors affecting taste and demand of consumer remain constant. ​
4. Consumer acts rationally to maximize their satisfaction. ​
5. Consumer buys a combination of two commodities. ​
6. IC express utility in ordinal number.​
   IC applies diminishing marginal rate of substitution.​

Question 20

What is the concept of Marginal Rate of Substitution?

Answer 20

MARGINAL RATE OF SUBSTITUTION:​
In economics, the marginal rate of substitution (MRS) is the amount of a good that a consumer is willing to consume compared to another goods, as long as the new good is equally satisfying. MRS is used in indifference theory to analyze consumer behavior.​
Formula:​
MRS (XY) = MUX / MUY​

Question 21

What is Budget Constraint/Budget Line?

Answer 21

The budget constraint is a concept in economics that represents the limit or boundary on a consumer’s consumption choices.

Question 22

Budget Line is determined by?

Answer 22

It is determined by the consumer’s income and the prices of goods and services in the market.​

Question 23

A budget line shows?

Answer 23

A budget line shows combinations of two goods, a consumer is able to consume, given budget Constraint.​
An indifference curve shows combination of two goods that yield equal satisfaction.

Question 24

In order to maximize a consumer must do?

Answer 24

To maximize utility, a consumer chooses a combination of two goods at which an indifference curve is tangent to the budget line.

Question 25

Give a relevant example for budget line.

Answer 25

For Example, if you have a certain amount of income and the prices of Pepsi is PKR 50 and Coke is PKR 60 respectively, your budget constraint would limit the quantity of Pepsi and Coke that you can purchase. The budget constraint plays a key role in determining the consumer’s choices and their equilibrium point.​

Question 26

When it comes to Consumer Behavior, there are three important effects to consider, what are they?

Answer 26

1. Price Effect
2. Income Effect
3. Substitution Effect

Question 27

Describe Income Effect.

Answer 27

Income Effect:
How changes in income impact consumer purchasing behavior.

1. When income increases, consumers buy more normal and inferior goods.
2. When income decreases, consumers cut back on overall consumption.

Question 28

Describe Price Effect.

Answer 28

Price Effect:
Result of changes in the price of goods or services.

1. When prices decrease, consumers buy more due to relative cheapness.
2. When prices increase, consumers buy less of that good.

Question 29

What is Consumer Surplus?

Answer 29

It measure the benefit or satisfaction that consumers gain from purchasing a good or service. Difference between the maximum price a consumer is willing to pay and actual price paid.​

Question 29

Describe Substitution Effect.

Answer 29

Substitution Effect:
Consumers switch goods based on changes in relative prices.

1. If Pepsi’s price increases and Coke’s remains same,
   consumers may buy more Coke as a substitute.

Question 30

Give an example of Consumer Surplus.

Answer 30

Example: ​
Imagine you’re buying a new phone and you’re willing to pay up to PKR 50,000 for it. However, you find a great deal and end up buying it for PKR 40,000. The consumer’s surplus in this case would be PKR 10,000, which represents the additional value or satisfaction you gained from paying less than your maximum willingness to pay.