consumer behavior

utility

satisfaction power of a commodity

cardinal utility

when utility can be measured in numbers like 1,2,3 etc

ordinal utility

when utility of commodities is ranked in order of preference

total utility

satisfaction obtained from all possible units of commodity

marginal utility

additional satisfaction obtained from consumption of one extra unit of the given commodity

law of diminishing marginal utility

when a consumer increases the consumption of one commodity keeping all others constant, marginal utility will eventually decrease

assumptions of diminishing marginal utility

1.price of all units must be same

2.consumer must be rational

3.there should be no change in taste or quality of the commodity

4.the utility is measurable

5.all units must be identical

indifference curve

graphical representation of when 2 different combinations of 2 goods give the same level of satisfaction

indifference map

set of multiple indifference curves showing various levels of satisfaction

properties of indifference curve

1. moves downwards from left ro right

2. two indifference curves cannot intersect otherwise they give in conflicting results

3. higher curve represents higher level of satisfaction “more is always better”

budget set

all possible combinations of 2 goods a consumer can afford given his income and prices in the market

or

all combinations of two goods whivh costs less than or equal to income of the consumer

formula for total utility

TU=sum of MU

formula for MU

MU=tu(n)-tu(n-1)

formula for budget set

p(1)x(1)+p(2)x(2)<=m

movement along with demand curve

when demand for a given commodity changes due to its price

shift in demand curve

when demand for a given commodity changes due to factors other than its price eg. income of consumer

slopes of demand curve