Theory of Consumer Behaviour

Objectives After going through this chapter you shall be able to understand the following concepts Consumer Behavior Theory- Ordinal

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A consumer spends the money available to him for purchasing different goods and services with the sole motive of attaining the eighties possible level of satisfaction.

Consumer Behavior Theory

Under the Consumer Behavior Theory, we examine the behavior of a rational consumer in the market of goods and services. This theory basically analysis the decision making process of a consumer. It examines how a consumer makes choice among different available goods and services with his/her fixed income and given market prices of the goods and services.

In Traditional Consumer Behavior Theory, it is assumed that a consumer has complete knowledge of all the available goods and services, their respective prices and all other relevant information required to decide mongo different alternatives. In other words, the essence of consumer behavior theory is to analyses how a consumer chooses among different available goods and services, with his given income and prices of goods and services, in order to achieve the highest possible satisfaction level.

It should be noted that in order to attain the highest possible level of satisfaction, a consumer must be able to compare the satisfaction derived from the consumption of various goods and services that he can purchase with his/her income. The question then arises is that how will a consumer do so. There are two approaches to answer his question-

The Cardinal Approach and the Ordinal Approach.

The Cardinal Approach and the Ordinal Approach Ordinal Approach Ordinal Approach postulates that a consumer cannot measure the satisfaction that he/she derives from the consumption of a particular good or service.

Further, it Theory of Consumer Behavior By simplistically arts that measurement tot satisfaction in specific units is not required. In tact, a ease consumer ranks different goods and services as per his/her preferences. In other words, it asserts that a consumer takes his consumption decisions on the basis of the ranks assigned in order of his/her preferences. This approach is explained in the next lesson) Cardinal Approach On the contrary, the Cardinal Approach postulates that it is possible for a consumer to measure (assign value to) the level of satisfaction that he/she derives from the consumption of a particular good or service.

This valuation of satisfaction can be done in various ways such as, in terms off subjective units called ‘utile’, in terms of money (monetary terms) or in terms of sacrifice of other goods and services (opportunity cost).

Utility Analysis and Optimal Choice of the Consumer

Utility refers to the satisfaction that a consumer expects to derive from the institution of a particular good. It is a subjective concept and varies from person to person and from time to time. For example, a commodity, say, apples provide different level of satisfaction to different persons.

Also, the same person can derive different level of satisfaction from consumption of apples at different points of time (for example, at the time of illness the apples may provide a consumer with a higher level of satisfaction). The concept of Cardinal Approach is based on the assumption that a rational consumer can express his/her utility in terms utile. As utility can be cardinally (or numerically) expressed in terms of utile, so this approach has been named as Cardinal Approach. A ITIL is a single unit of utility.

Utile refer to the cardinal numbers that are assigned to different consumption bundles to represent the expected level of satisfaction derived from them. The numerical values are assigned by the consumer in such a manner that the more preferred consumption bundles are given higher values than the lesser preferred ones.

Important Note: It should be noted that the concept of ITIL has no standard unit such as, centimeters, grams, kilometers, etc. A consumer himself defines utile for different institution bundles and accordingly assigns cardinal numbers