Consumer Point Of View

Decision- making behavior of individual and firms in the market are dealt. We will discuss the individual (consumer / buyer) decision-making behavior, how does he/ she respond and deal with the change of prices and other factors? How does he/she make a choice within his/her scarce resource?

Who is Consumer / Buyer?

A consumer is a person who buys goods and services to derive the satisfaction of wants and his aim is to derive maximum satisfaction (i.e sense of happiness) of his expenditure. What is satisfying power? i.e how much satisfied?

In economics utility is satisfying power or capacity of commodity to satisfy human wants. Utility depends upon the intensity of want for the commodity and it can be measured in units of happiness called UTILS (also called cardinal approach). Utils can decrease as the number of products or services as consumption increases. Suppose, the first slice of pizza may yield 10 utils, and the second slice of pizza may yield 6 utils, as more pizza is consumed, the utils may decrease more because people become full. This will help consumers understand how to maximize their utility by allocating their money between multiple types of goods and services as well as help companies understand how to structure tiered pricing. The economic utility of a good or service is important to understand because it will directly influence the consumer’s demand, and price of that good or service. Always keep remember that-------- Utility ≠ Usefulness Example: a cigarette has sense of happiness for smoker, while smoking is not good for health.

The additional satisfaction derived from the consumption of an additional unit of a commodity is called marginal utility.

i.e MU= Utility of one unit

The tendency for marginal utility to decrease as the quantity consumed of a good increases. The sum total of all utilities derived from the consumption of all the units of a commodity is called total utility. TU = Sum of all Marginal Utilities i.e TU = ∑MU Let's see how a consumer consumes oranges and gets Marginal Utility i.e 0 orange gives 0 utils, 1 orange gives 20 utils marginal utility, 2nd orange gives 15 utils, 3rd orange gives 10 utils and 4th gives 5 utils, means as oranges are consuming, marginal utility diminishing or decreasing. Although total utility usually increases as more of a good is consumed, marginal utility usually decreases with each additional increase in the consumption of a good. This decrease demonstrates the law of diminishing marginal utility.

Because there is a certain threshold of satisfaction, the consumer will no longer receive the same pleasure from consumption once that threshold is crossed. In other words, total utility will increase at a slower pace as an individual increases the quantity consumed. Take, another example, a chocolate bar. Let's say that after eating one chocolate bar your sweet tooth has been satisfied. Your marginal utility (and total utility) after eating one chocolate bar will be quite high. But if you eat more chocolate bars, the pleasure of each additional chocolate bar will be less than the pleasure you received from eating the one before - probably because you are starting to feel full or you have had too many sweets for one-day. In order to determine what a consumer's utility and total utility are, economists turn to consumer demand theory, which studies consumer behavior and satisfaction. Economists assume the consumer is rational and will thus maximize his or her total utility by purchasing a combination of different products rather than more of one particular product. Thus, instead of spending all of your money on three chocolate bars, which has a total utility of 85, you should instead purchase the one chocolate bar, which has a utility of 70, and perhaps a glass of milk, which has a utility of 50. This combination will give you a maximized total utility of 120 but at the same cost as the three chocolate bars.

As discussed earlier that there are not enough resources to satisfy everyone’s desires because human desires may be unlimited and resources are not. So we have to make trade-offs i.e we have to make sacrifices and choose one thing over another. We make choices by considering both the costs and benefits of each activity. We have to always make sure that benefits of our choices are greater than costs. Every choice in life has opportunity costs. Every decision involves the sacrifice of the benefits of an alternative that was not chosen. There are so many situations where you have to choose one product or one service over another. You choose one perfume instead of another. Suppose If you deposit money in a bank instead of buying a car, the cost of earning interest would be the missing value of having a car in my garage. Suppose if I have chosen a Head & Shoulder Shampoo over a Sunsilk Shampoo, the cost of having Head & Shoulder shampoo includes the missing value of having sunsilk shampoo, this value of missed opportunity incurs costs, this cost is called opportunity cost.

Demand / Desire:

Economics is all about understanding how incentives and disincentives affect typical human behavior. Here we will discuss that how does a consumer behave differently in the market? when prices increase or decrease because different commodities have different prices.

What is Demand?

Demand refers to the amount of good or service that consumer/buyer is willing and able to buy at specified price.

Law of Demand:

As prices for a good or service rises (increases) demand falls (decreases) as prices falls (decreases) demand rises (increases).

Suppose you have buying one 250 ml bottle of mineral water for Rs. 6 every day. One day you have found that price has gone down to Rs.5. so you will buy two bottles, again when prices will decrease, you will increase the buying quantities,

Same as the prices will increase you will decrease the buying quantities of bottles i.e on price of Rs. 1, you are willing to buy 7 bottles, when price goes up to Rs. 2, you will decide to buy 6 bottles, finally price goes up to Rs. 7 then you will be able to afford only 1 bottle. . Following is the table / schedule for your better understanding:

Price (Rs.) Quantities in units (Q)

7 1

6 2

5 3

4 4

3 5

2 6

1 7

The above curve is downward sloping, which indicate the inverse relationship between the price and quantity.which also reflects the Law of Demand i.e when price is increasing, the quantity demanded is decreasing and when the price is decreasing, the quantity demand ed is increasing.