Consumer Behaviour and Analysis

Concept of Consumer Preferences

Theory of consumer behaviour deals with reconciliation of our dreams with our budget Significance of demand analysis: in planning, cost budgeting, purchase plan, market research, pricing decision, advertising budget.. Motive: to maximise the total level of satisfaction Chose alternatives based on likes and dislikes within the constraint of budget Utility: extent of satisfaction obtained from consumption of goods and services preferred by consumers

Cardinal approach: utility can be measured in units called utils Ordinal approach: utility cannot be quantified

Assumptions

Four basic assumptions are made in developing model of consumer choice Individuals can rank their preferences for alternative bundles of goods and services Nonsatiation: more of a good/ service is preferred to less Transitivity: preferences are consistent Individuals are willing to give up successively smaller amounts of one good in order to get additional units of other goods, Marginal rate of substitution (MRS)

Law of Diminishing Marginal Utility

Marginal Utility: extra satisfaction a consumer can receive by consuming an extra unit of a good i.e. Change in Total Utility/ I unit change in qty consumed Law states that MU of any good tends to decline as more of a good is consumed over a definite period of time Thus total utility increases (at a declining rate) upto a point, then becomes constant and then starts to decrease, accordingly MU curve is downward sloping and then negative (when TU curve starts to fall)

Indifference Curves

Represents all bundles/ combinations of goods that provide an individual with equal levels of satisfaction, ie. Consumer is indifferent amongst these combinations Properties of an IC: - IC is downward sloping: to consume more of one good, he has to give up some qty of the other good, leading to negative slope - Two ICs cannot intersect/ touch each other: Each represents a separate level of satisfaction - An IC is convex to the origin: due to falling Marginal Rate of Substitution (MRS), consumer will give up less of one good to get more of another, law of diminishing MRS - A higher indifference curve represents a higher level of satisfaction

Indifference Curve

Slope of a point on an IC is slope of tangent drawn at that point, i.e. MRS Indifference Map: Set of ICs representing different levels of satisfaction

Budget Line/Constraint

Assuming consumer spends all his income, budget line is derived Divides into attainable and non attainable areas Income= amount spent on good one + amount spent on good two Amount spent= price x quantity Slope of the budget line = P1/ P2 BL shifts left/ right due to decrease/ increase in income, prices of goods remaining the same BL rotates on one axis if price of good changes, income remaining the same

Utility Maximisation/ Equilibrium

Equilibrium point is where the highest IC is tangent to BL At this point, ratio of prices of goods equal to MRS, ie. slopes of IC and BL are equal Any other point, either not within his budget, or there is scope for maximizing his utility

Techniques of Demand Estimation

Techniques/ Methods

Survey Methods

Statistical Methods

Survey Methods

Consumers Interview Method:

Through a questionnaire Direct Interview method: complete or sample survey

Collective Opinion Method Expert Opinion Method End Use Method

Statistical Methods

Trend Projection method: time series/ least squares method to derive a regression equation Barometric methods: with leading and lagging indicators, and coincidental series Economic Indicators: some macro economic parameters which influence demand of certain goods; build up an econometric model