ASSIGNMENT ON THEORY OF CONSUMER BEHVIOR AND THEORY OF CONSUMER CHOICE

NAME: SYED TANZEEL AKHTER REG NO: 19775 PROGRAM: MBA ASSIGNMENT NO: 02 SECTION: THU 6 to 9 CODE: 8242 COURSE: ECONOMIC ANALYSIS FOR MANAGEMENT SUBMITTED TO: SIR ASIF WARSI

HISTORY OF THE THEORIES:

Beginning about 300 years ago early economists, led by Nicholas Bernoulli, John von Neumann and Oskar Morgenstern, started to examine the basis of consumer decision making (Richarme 2007). This early work approached the topic from an economic perspective, and focused solely on the act of purchase (Loudon AND Della Bitta 1993).The most prevalent model from this perspective is Utility Theory which proposes that consumers make choices based on the expected outcomes of their decisions. Consumers are viewed as rational decision makers who are only concerned with self interest (Schiffman ANDKanuk 2007, Zinkhan 1992). Where utility theory views the consumer as a rational economic man (Zinkhan 1992), contemporary research on Consumer Behavior considers a wide range of factors influencing the consumer, and acknowledges a broad range of consumption activities beyond purchasing. These activities commonly include; need recognition, information search, evaluation of alternatives, the building of purchase intention, the act of purchasing, consumption and finally disposal. This more complete view of consumer behavior has evolved through a number of discernable stages over the past century in light of new research methodologies and paradigmatic approaches being adopted. While this evolution has been continuous, it is only since the 1950s that the notion of consumer behaviour has responded to the conception and growth of modern marketing to encompass the more holistic range of activities that impact upon the consumer decision (Blackwell,Miniard et al. 2001). This is evident in contemporary: consumer behaviour is the study of the processes involved when individuals or groups select, purchase, use or dispose of products, services, ideas or experiences to satisfy needs and desires. (Solomon,Bamossy et al. 2006). (Schiffman AND Kanuk 2007) take a similar approach in defining consumer behavior: The behavior that consumers display in searching for, purchasing, using, evaluating, and disposing of products and services that they expect will satisfy their needs

DIFFERENCE BETWEEN CONSUMER CHOICE AND CONSUMER BEHAVIOR:

The traditional approach to consumer behavior from a choice-based point of view, that consumers made choices about which consumption bundle to choose from a set of feasible alternatives, and, using some rather mild restrictions on choice were able make predictions about consumer behavior The traditional approach to consumer behavior is to assume that the consumer has well-dened preferences over all of the alternative bundles and that the consumer attempts to select the most preferred bundle from among those bundles that are available. The nice thing about this approach is that it allows us to build into our model of consumer behavior how the consumer feels about trading o one commodity against another.

Theory of Consumer Behavior:

The principle assumption upon which the theory of consumer behavior and demand is built is: a consumer attempts to allocate his/her limited money income among available goods and services so as to maximize his/her utility (satisfaction).

Theory of Consumer Choice:

Consumer choice theory is a way of analyzing how consumers may achieve equilibrium between preferences and expenditures by maximizing utility as subject to consumer budget constraints

Rational behavior: The consumer is a rational person, who tries to use his or her money income to derive the greatest amount of satisfaction, or utility, from it. Consumers want to get "the most for their money" or, to maximize their total utility. Rational behavior also "requires" that a consumer not spend too much money irrationally by buying tons of items and stock piling them for the future, or starve themselves by buying no food at all. Consumers (we assume) all engage in rational behavior. Preferences: Each consumer has preferences for certain of the goods and services that are available in the market. Buyers also have a good idea of how much marginal utility they will get from successive units of the various products they might purchase. However, the amount of marginal & total utility that the people will get will be different for every individuals in the group because all individuals have different taste and preferences. Budget Constraint: The consumer has a fixed, limited amount of money income. Because each consumer supplies a finite amount of human and property resources to society, he or she earns only limited income. Every consumer faces a budget constraint There is infinite demand, but limited income Prices: Goods are scarce because of the demand for them. Each consumers purchase is a part of the total demand in a market. However, since consumers have a limited income, they must choose the most satisfying combination of goods based partially on prices. For producers, a lower price is needed in order to induce a consumer to buy more of their product.

The Cardinal Approach:

Utility is measurable in a cardinal sense. Satisfaction can be measure. Nineteenth century economists, such as Jevons, Menger and Walras, assumed that utility was measurable in a cardinal sense, which means that the difference between two measurement is itself numerically significant. UX = f (X), UY = f (Y), .. Utility is maximized when: MUX / MUY = PX / PY

The Ordinal Approach:

Utility is measurable in an ordinal sense. Satisfaction cannot be measure. Economists following the lead of Hicks, Slutsky and Pareto believe that utility is measurable in an ordinal sense--the utility derived from consuming a good, such as X, is a function of the quantities of X and Y consumed by a consumer. U = f ( X, Y ) MARGINAL RATE OF SUBSTITUTION: The marginal rate of substitution is the rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility. At consumption levels, our marginal rates of substitution are identical MRS of X for Y is the amount of Y for which a consumer is willing to exchange X locally. The MRS is different at each point along the indifference curve thus it is important to keep locally in the definition. Further on this assumption, or otherwise on the assumption that utility is quantified, the marginal rate of substitution of good or service X for good or service Y (MRSxy) is also equivalent to the marginal utility of X over the marginal utility of Y. Formally,

MARGINAL RATE OF TECHNICAL SUBSTITUTION:

The Marginal Rate of Technical Substitution (MRTS) - or Technical Rate of Substitution (TRS) - is the amount by which the quantity of one input has to be reduced ( ) when one extra unit of another input is used ( ), so that output remains constant ( ).

Where, and

and

are the marginal products of input 1 and input 2, respectively, is Marginal Rate of Technical Substitution of the input for .

In other words, it shows the relation between inputs, and the trade-offs amongst them, without changing the level of total output. When using common inputs such as capital (K) and labour (L), the MRTS can be obtained using the following formula: