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Assignment on Consumer Behavior

Submitted by:
Sujeet Kumar
MBA 1st Semester
Roll No. 25
Business Economics (114)

Sujeet Kumar MBA 1st Semester

Business Economics
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ASSIGNMENT QUESTION:
State and explain the axiom behind the analysis of consumer’s behavior with suitable
example.

SOLUTION:
Consumers play an important role in determining the demand for a firm’s products.
They are quality conscious and price sensitive. The success of a product is
dependent on the consumer’s acceptance of the product. Price Sensitive customers
like to buy product in small quantities at affordable prices. For example, Indian
electronic products like computer CD, storage devices etc are available at high price
and better quality with service and warranty. On the other hand the same category of
product is available at more cheaper and affordable price in the Gray Market.
Therefore, firms must try to offer products that are of high quality, at affordable
prices. Consumer behavior is an important determinant of the type of product a firm
should produce. Before launching a product a firm has to take into consideration its
target customers tastes and preferences. For example, when Dabur Foods launched
Real orange juice, consumers rejected it because it tasted bitter. Research reveled
that Indian consumers wanted juices to be sweeter. Dabur then modified Real’s taste
by sweetening the orange juice.

Consumer behavior assumes that every individual tries to maximize his satisfaction
by consuming products and services with the limited income available to him at a
particular time. This limited income can also be referred to as the budget constraint.

In economics, consumer behavior theory explains the relationship between changes

in price and consumer demand. Variations in price determine whether a particular
product is in demand or not. If the demand for a product is low in spite of the price
being less, it can be said that consumers are not accepting that product. On the
other hand, if the demand for a particular product is high, then the price of the
product would increase. Hence the manufacturer can determine and fix prices of
their products according to the consumer demand. Thus, consumer behavior plays
an important role for manufacturer’s decision making.

Sujeet Kumar MBA 1st Semester

Business Economics
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In more simple terms, “Consumer behavior is the process and activities where
people engage in the searching, selecting, purchase, using, evaluating and
disposal of products and services so as to satisfy their needs and desires.”

Axioms of Consumer Behavior:

• Existence of utility:
In economics, the term ‘utility’ is used to denote that quality of a commodity or
services by virtue of which our wants are satisfied. In other words, want
satisfying power of a good is called utility. This is assumed to be measured in
terms of cardinal numbers, such as 1,2,3,4 etc. These numbers are called
Utils or units of utility. Thus, 4 Utils of utility are greater than 3 utils of utility
and so on.

Thus, according to this axiom, utility is the function of satisfaction gained from
the consumption of goods or services. Numerically, it can be expressed as

U = f (x, y)

Where, X and Y are two different goods and x and y are quantity or number of
units of goods X and Y respectively.

E.g. Lets take two substitute goods. i.e. Tea and coffee, where when a
consumer consumes 1 cup of tea and 2 cup of coffee, he gets different level
of satisfaction. In this case, utility function can be shown as

U= f (T, C)

= f (1, 2)

• Law of Non-satiety:
The law of non satiety states that the consumer’s satisfaction is immeasurable
and it also focus on the assumption that consumers are not satisfied whether
whatever the number of utils he/she consumes.

The above statement can be expressed numerically as:

MUx = du / dx > 0

Sujeet Kumar MBA 1st Semester

Business Economics
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Where, MUx represents Marginal utility of goods X

du / dx represent change in the utils of x.

in the above equation, it represents that, the MU of goods X cant be Zero or it

should be greater than Zero i.e. positive. This is also known as 1st order
derivative.

E.g. when a hungry man have one piece of bread he gets certain satisfaction
and he will get more or less some level of satisfaction with each unit of further
additional consumption.

• Law of Diminishing Marginal Utility:

The law of diminishing marginal utility states that as more and more standard
units of a commodity are continuously consumed, marginal utility derived from
every additional unit must decline. Indeed, it is so very natural to happen in
respect of all goods and services. It is, therefore, called ‘Fundamental law of
Satisfaction’.

Marginal utility refers to additional utility on account of the consumption of an

additional unit of a commodity.

Where in the above Law standard unit of a commodity means a cup of tea,
not a spoon of tea; a glass of milk, not a drop of milk etc should be consumed
at a point of time.

The above law may be expressed numerically as,

{d (du / dx)} / dx < 0

Or, d2U / dx2 < 0

This signifies that Marginal Utility of commodity X should be less than 0 or

can’t be 0 i.e. it should always be negative. The above equation is also known
as 2nd order derivative.

For e.g. when we consume, two piece of chicken, we get an utils of 4 but
when we consume 6 piece of chicken the utils of 10 is measured. It signifies
that the Marginal utility declines but total utility increases.

Sujeet Kumar MBA 1st Semester

Business Economics
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This can be shown below in a tabulated form:

Quantity Total Utility Marginal Utility Description

0 0 -
1 8 8 Initial Utility
2 14 6
3 18 4 Positive Utility
4 20 2
5 20 0 Zero Utility
6 18 -2 Negative Utility

Sujeet Kumar MBA 1st Semester

Business Economics