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Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior Complete Details

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior Complete Details

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior :  Cakart team members provides here Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior Complete  Notes and other CBSE Class 12 Commerce Mathematics  Complete Notes in pdf format. We provides you direct link for downloading Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior Complete Notes in pdf format. Download here Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior Complete Notes and read well.

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior Complete Details

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior : Consumer Behavior is the study of consumers and the processes they use to choose, use (consume), and dispose of products and services. A more in depth definition will also include how that process impacts the world. Consumer behavior incorporates ideas from several sciences including psychology, biology, chemistry and economics. Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior main topics complete details are given here :

1) Karnataka Class 12 Commerce Economics Utility Analysis Complete Notes :

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior : It can be seen that at each step, the additional utility becomes smaller and smaller. At the seventh unit, there is no addition at all, i.e., the marginal utility is zero, and then it becomes negative, which is re­presented by the shaded area below the axis of X.

We may distinguish between initial utility, total utility, and zero utility and negative utility.

Download here Karnataka Class 12 Commerce Economics Utility Analysis Complete Notes in pdf format

Initial Utility:

It is the utility of the initial or the first unit. In the table given on the previous page, the initial utility is 15.

Total Utility:

Look at column 3 of the table. It gives the total utility at earn step. For example, if you consume one ‘rasgulla’, the total utility is 15; if you consume two, the total utility is 28, and so on.

Zero Utility:

When the consumption of a unit of a commodity makes no addition to the total utility, then it is the point of zero utility. In our table, the total utility, after the 6th unit is consumed, is 52. At the seventh also it is 52. Thus, the seventh ‘rasgulla results’ in no increase whatsoever. This is the point o’ zero utility, it is thus seen that the total utility is maximum when the marginal utility is zero.

Negative Utility:

If the consumption of a commodity is carried to excess, then instead of giving any satisfaction, it may cause dissatisfaction. The utility in such cases is negative. In the table given above the marginal utility of the 8th and the 9th units is negative.

Limitations or Exceptions:

The Law of Diminishing Utility says that as we go on consuming more and more units of a commodity, the utility falls with every successive unit consumed. But this is not always true. We may, therefore, see below what those limitations or exceptions are.

Dissimilar Units:

If the units are not identical, the law will not apply For instance, if the second ‘rasgulla’ is much larger than the first-one, it will yield more satisfaction than the first. The law will apply only if the units are similar.

Very Small Units:

If we are given water by the Spoonful when we .are very thirsty, each successive spoonful will give us more satisfaction. If, however, the unit is the usual tumbler of water, the law starts working at once. In the case of very small units, the law applies at a later stage. At first the marginal utility will therefore, increase instead of decreasing. But ultimately the marginal utility must fall if the consumption is continued, and this is exactly what the law says.

Too Long an Interval:

Suppose you take your morning meal at 10 A.M. and your dinner at 8 P.M. If you eat nothing in between, the dinner will probably yield even greater satisfaction than your breakfast. But if you are asked to take another meal within an hour of the first, the law undoubtedly applies. The law, therefore, applies only when the units of the commodity are taken quickly one after another within a reasonable period of time.

Rare Collections:

The law does not apply in the case of rare collections. If a person has a hobby of collecting rare coins, the larger the number he collects the greater will be his happiness, whereas according to this law it should be less and less.

Abnormal Persons:

When we discuss this law, we assume that we are talking of normal persons. But there are some abnormal people too, e.g., misers. The more money a miser has, the greater is the satisfaction that he derives. The law, therefore, does not apply to abnormal persons like misers, drunkards, musicians, etc., who want more and more of the commodity they are in love with. In such cases, the consumption excites further desire and hence yields greater satisfaction.

Change in another Person’s Stock:

Sometimes utility changes not because change has taken place in the stock of the commodity that a person has of clause a change has taken peace in another person’s stock. Suppose, there are two persons collecting stamps in a town and both are rivals. Suppose further that by an accident the stock of one of them is destroyed. Automatically, the value of the stock of the other person will go up even though there has been no change in his stock.

Changes in Income, Habits and Tastes:

We may add that a change in a consumer’s income, a change in fashion, and a change in other possessions of the consumer also seem to upset the Law of Diminishing Marginal Utility. In such cases, increase in consumption may yield greater and greater satisfaction.

Conclusion:

However, in spite of the above limitations or exceptions, the law has universal application. This is so because it expresses a basic principle of human behaviour.

2) Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes :

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior :  The measurement of utility has always been a controversial issue. Neo-classical economists, such as Alfred Marshall, Leon Walrus, and Carl Meneger believed that utility is cardinal or quantitative like other mathematical variables, such as height, weight, velocity, air pressure, and temperature.

Therefore, these economists developed cardinal utility concept to measure the utility derived from a good. They developed a unit of measuring utility, which is known as utils. For example, according to the cardinal utility concept, an individual gains 20 utils from ice-cream and 10 utils from coffee.

However, modern economists, such as J.R. Hicks, gave the concept of ordinal utility of measuring utility. According to this concept, utility cannot be measured numerically, it can only be ranked as 1, 2, 3, and so on. For instance, an individual prefers ice-cream than coffee, which implies that utility of ice-cream is given rank 1 and coffee as rank 2.

Let us discuss these two concepts in detail in the next sections.

Download here Karnataka Class 12 Commerce Economics Cardinal And Ordinal Approach Complete Notes In PDF Format

1. Cardinal Utility Concept:

The neo-classical economists propounded the theory of consumption (consumer behavior theory) on the assumption that utility is cardinal. For measuring utility, a term ‘util’ is coined which means units of utility.

Following are the assumptions of the cardinal utility concept that were followed by economists while measuring utility:

a. One util equals one unit of money

b. Utility of money remains constant

However, over a passage of time, it has been felt by economists that the exact or absolute measurement of utility is not possible. There are a number of difficulties involved in the measurement of utility. This is because of the fact that the utility derived by a consumer from a good depends on various factors, such as changes in consumer’s moods, tastes, and preferences.

These factors are not possible to determine and measure. Therefore, no such technique has been devised by economists to measure utility. Utility; thus, is not measureable in cardinal terms. However, the cardinal utility concept has a prime importance in consumer behavior analysis.

2. Ordinal Utility Concept:

Cardinal utility approach is based on the fact that the exact or absolute measurement of utility is not possible. However, modern economists rejected the cardinal utility approach and introduced the concept of ordinal utility for the analysis of consumer behavior.

According to them, it may not be possible to measure exact utility, but it can be expressed in terms of less or more useful good. For instance, a consumer consumes coconut oil and mustard oil. In such a case, the consumer cannot say that coconut oil gives 10 utils and mustard oil gives 20 utils.

Instead he/she can say that mustard oil gives more utility to him/her than coconut oil. In such a case, mustard oil would be given rank 1 and coconut oil would be given rank 2 by the consumer. This assumption lays the foundation for the ordinal theory of consumer behavior.

According to neo-classical economists, cardinal measurement of utility is possible in practical situations. Moreover, they believed that the concept of cardinal utility is useful in analyzing consumer behavior. However, modern economists believed that utility is related to psychological aspect of consumers; therefore, it cannot be measured in quantitative terms.

3) Karnataka Class 12 Commerce Economics Concepts Of Utility Complete Notes :

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior :  Although the concept of ‘taste’ and ‘satisfaction’ are familiar for all of us, it is much more difficult to express these concepts in concrete terms. For example, suppose you have just eaten an ice-cream and a chocolate.

Can you tell how much are you satisfied from each of these items? Probably you can tell which item you liked more. But, it is very difficult to express “how much” you liked one over the other. It is evident, that we need a more quantitative measure of satisfaction. Due to this reason, economists developed the concept of utility.

4) Karnataka Class 12 Commerce Economics Concept Of Consumer Behavior Complete Notes :

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior :  Consumer behavior is the study of individuals, groups, or organizations and the processes they use to select, secure, use, and dispose of products, services, experiences, or ideas to satisfy their needs and wants. It is also concerned with the social and economic impacts that purchasing and consumption behavior has on both the individual consumer and on broader society. Consumer behavior blends elements from psychology, sociology, social anthropology, marketing and economics, especially behavioral economics. It examines how emotions, attitudes and preferences affect buying behavior. Characteristics of individual consumers such as demographics, personality lifestyles and behavioral variables such as usage rates, usage occasion, loyalty, brand advocacy, willingness to provide referrals, in an attempt to understand people’s wants and consumption are all investigated in formal studies of consumer behavior. The study of consumer behavior also investigates the influences, on the consumer, from groups such as family, friends, sports, reference groups, and society in general.

Download here Karnataka Class 12 Commerce Economics Concept Of Consumer Behavior Complete Notes In PDF Format

5) Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes :

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior :  An indifference curve is a locus of combinations of goods which derive the same level of satisfaction, so that the consumer is indifferent to any of the combination he consumes.If a consumer equally prefers two product bundles, then the consumer is indifferent between the two bundles. The consumer gets the same level of satisfaction (utility) from either bundle. Graphically speaking, this is known as the indifference curve. An indifference curve shows combinations of goods between which a person is indifferent.

Symbolically,in the equation form,

An Indifference Curve =$U = f (x_1,x_2,x_3,…..x_n)= k$ ……where, k is a constant.

Download here Karnataka Class 12 Commerce Economics Indifference Curve Analysis Complete Notes In PDF Format

6) Karnataka Class 12 Commerce Economics Optimal Choice Of The Consumer Complete Notes :

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior :  A consumer optimum represents a solution to a problem facing all individuals — maximizing the satisfaction (utility) from consuming different goods and services subject to the constraint of household income and product prices. This problem can be described as follows:

max U = f(X,Y)

s.t. Px(X) + Py(Y) < I

In this problem, the objective function is unobservable leading to the use of assumptions about consumer preferences and diagrammed through the use of indifference curves. From our understanding of the utility function and utility surface we can derive the slope of an indifference curve as:

the Marginal Rate of Substitution = MRSxy = MUx/MUy

However, the all variables and parameters in the budget constraint are observable and thus in defining our consumer optimum, we assume that this optimum lies on this constraint. This budget constraint can be written in several ways. First we can write it as a budget set ‘B’:

B = {X,Y e R2 | X,Y > 0; Px(X) + Py(Y) < I0}

This budget set represents all combinations of the two goods that are attainable to the consumer given his level of income and the the market-determined prices of these goods. Second, we can write it as a budget constraint expressed as an exact equality in intercept-slope form:

Y = I0/Py – (Px/Py)X

The slope of this budget constraint is a relative price (the price of good-x relative to the price of good-y) where a change in any price, either in absolute or relative terms, will lead to a rotation of this constraint. Both this budget constraint and budget set are shown in figure 1.

 figure 1, A Consumer Optimum

In this diagram, we can note that many bundles of ‘x’ and ‘y’ on IC0 are within this budget set and thus attainable. However, any point in the interior of the budget set represents an inefficient use of income. Point V on this same indifference curve does represent an efficient use of income however, the consumer can do better. At this point the slope of the budget constraint is greater than the slope of the indifference curve…

Px/Py > MUx/MUy

or

MUx/Px < MUy/Py

At this point the marginal utility per dollar spent on good-x is less that the marginal utility per dollar spent on good-y. This consumer can increase his level of satisfaction by reallocating his income to buy more of good-y (thus MUy will decrease given our assumption of diminishing marginal utility) and buy less of good-x (MUx increases). This reallocation of income can be seen as a movement along the budget constraint from point V to point R. It is at point R that the consumer has found an optimum on IC1 where:

MUx/MUy = Px/Py
or
MRSxy = Px/Py

This is our condition for a consumer optimum. Note that any bundle on IC2, although providing a greater level of satisfaction, lies entirely beyond the budget set and thus could never include a solution to the problem facing the consumer.

Karnataka Class 12 Commerce Economics Chapter 2 Theory Of Consumer Behavior Complete Details

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