Theory of Consumer Behaviour

Flashcards for review of consumer behavior theory.

Utility

The property of a commodity that satisfies a want or need of a consumer; the want satisfying power of a commodity.

Total Utility

The total satisfaction a consumer gets from consuming a certain quantity of a commodity.

Marginal Utility

The extra satisfaction obtained from consuming one additional unit of a commodity.

Cardinal Utility Theory

Utility is measurable just as prices and quantities are using ‘utils’.

Ordinal Utility Theory

Utility is not measurable like prices, but can be ordered or ranked.

Additive Utility

The theory that the utility derived from the consumption of all goods and services is additive in nature.

Law of Diminishing Marginal Utility

As a consumer increases the consumption of a product, the utility gained from successive units goes on decreasing.

Consumer Equilibrium

When a consumer has maximized his satisfaction, spent his entire income, attained optimum allocation of expenditure, and consumed optimum quantity of each commodity.

Law of Equi-Marginal Utility

A consumer maximizes total utility by distributing the entire income optimally among the various commodities consumed, ensuring the marginal utility derived per unit of expenditure is the same for all commodities.

Indifference Curve

A curve showing combinations of goods that give a consumer the same level of satisfaction.

Marginal Rate of Substitution (MRS)

The rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility.

Indifference Map

A set of indifference curves representing the complete picture of a consumer’s preferences.

Budget Line

Represents all the combinations of two products that can be purchased for a given amount of income.

Willingness to Pay

The maximum amount a buyer is willing to pay for a good.

Consumer Surplus

The amount that a buyer is willing to pay for a good minus the amount the buyer actually pays.

Producer Surplus

The price received by the seller minus the price he is willing to sell at.