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Theory of Consumer Behaviour

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  • Last Updated : 09 Aug, 2022

Consumer Behaviour is the study of individual customers, organizations, or groups’ behaviour while selecting, purchasing, using, and disposing of the goods, ideas, and services so they can meet their wants and needs. In simple terms, consumer behaviour is the study of consumers’ actions and reactions in the marketplace and the reason behind their actions. 

Consumer

A consumer is a person who purchases goods and services for the satisfaction of needs and wants. A consumer is the end-user of the goods and services and cannot resell them. The choice and need of the consumer for a good and service have a great impact on various decisions of an organization. 

Importance of Consumer

  • A consumer creates demand for different products in the market. It means that the needs and wants of a consumer for different goods and services create its demand in the market and hence, the need to produce them.
  • A consumer consumes not only goods, but also a variety of services. Hence, the consumers in a market enhance the diversification of different services. Examples of services are banking, health care, insurance, etc. 
  • A consumer also plays a crucial role in increasing demand for consumer goods. Consumer goods are of two types: durable and non-durable goods. Durable goods are those consumer goods that have a life span of more than three years, such as television, refrigerator, washing machine, etc. However, non-durable goods are those consumer goods that have a life span of less than three years or can be a single use goods such as drinks, snacks, fruits, etc. 

Consumer Behaviour

The behaviour of a person is the way they act or behave in a certain situation. Every individual has different perspectives, opinions, views, wants, tastes and needs. Hence, consumer behaviour deals with the way consumers spend their income on different services and goods. For example, if a consumer has ₹2,000 and has different options to spend the money, like movies, clothes and food, there are different ways in which he can spend the money. He can either spend the whole amount on one option or distribute the amount among two or more options. The way in which the consumer uses his money will show his behaviour or consumer behaviour. 

Utility

Utility is the want satisfying power of a consumer for a specific commodity. A consumer decides the demand for a good based on the utility he/ she derives from the consumption of that good. In simple terms, utility is the satisfaction gained by the consumer after the consumption of a specific good. Utility is subjective in nature, and hence, different individuals gain different levels of utility from the same good. The more a consumer needs a commodity after its consumption, the more will be the utility derived from that commodity. For example, a consumer who likes ice cream will derive more utility from its consumption than some other consumer who is not fond of ice cream. 

Study of Consumer Behaviour

Cardinal Utility Approach

Under the cardinal utility approach, we assume that the utility level can be measured and expressed in numbers. For example, we can measure the utility of a commodity, let’s say, chocolates, and say that a consumer gets 20 units of utility from chocolates. 

Ordinal Utility Approach

Even though the cardinal utility approach is simple, it has a major drawback, as in real-life, we cannot measure their satisfaction level in numbers. However, we can rank our preferences amongst the alternatives by expressing which commodity gives less or more utility. For example, there are two commodities, apple and banana; the consumer consumes both commodities, and likes apples more than bananas. We can say that an apple provides the consumer with more utility than a banana. 

Comparison between Cardinal and Ordinal Utility

Basis

Cardinal Utility

Ordinal Utility

Meaning

The measurement of utility or satisfaction derived by a consumer after consuming goods or services in numerical terms.

The measurement of utility or satisfaction derived by a consumer after consuming goods or services in qualitative terms.

Realistic

Cardinal utility is less realistic.

Ordinal utility is more realistic.

Approach

It is a quantitative approach.

It is a qualitative approach.

Measurement

Cardinal utility is measured in utils.

Ordinal utility is measured in ranks.

Analysis

Cardinal utility is measured by Marginal Utility Analysis.

Ordinal utility is measured by Indifference Curve Analysis.

Cardinal Utility

The two different measures of utility under cardinal utility are:

1. Total Utility

The total utility of a commodity’s fixed quantity is the total satisfaction level derived by a consumer from the consumption of a given commodity. The total utility of a commodity depends on the quantity consumed by the consumer. For example, the total utility of a commodity, let’s say, mango, is derived from consuming 10 units. 

2. Marginal Utility

The marginal utility of a commodity is the change in its total utility because of the consumption of one additional unit of the commodity. For example, suppose 5 chocolates give a consumer 20 units of total utility, and 6 chocolates give him 25 units of utility. The consumption of one extra chocolate will provide him extra utility of 5 units. Therefore, the marginal utility of the consumer will be 5. Hence, the formula for determining the MU of a commodity is

MUn = TUn – TUn-1

Where,

MUn = Marginal utility from nth unit

TUn = Total utility from n units

TUn-1 = Total utility from n-1 units

n = Number of units of consumption

Law of diminishing marginal utility

The law of diminishing marginal utility states that as a consumer consumes more of a commodity, the marginal utility derived from every additional unit consumed will decrease. The law of demand is based on the law of diminishing marginal utility. It means that a consumer is ready to spend less money for more units of a product as the utility level for the commodity decreases with the increase in consumption.

Assumptions for the law of diminishing marginal utility are:

  • There is continuous consumption of a commodity.
  • The consumer is consuming only standard units of a commodity.
  • The satisfaction level is measured in numerical or quantitative terms.
  • The quality of a commodity does not change.
  • The consumer consuming the commodities is rational. 
  • The income of the consumer and the price of the commodity are fixed.

Ordinal Utility

Indifference curve 

An indifference curve is a graphical representation of two commodities giving the same level of satisfaction to a consumer. It means that every point of the indifference curve gives the same satisfaction level to the consumer. For example, the satisfaction level gained by Sam from consumption of 1 unit of apple and 14 units of mango is the same as the satisfaction gained by her from consumption of 2 units of apple and 8 units of mango. 


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