Theory of Consumer Behaviour

  Theory of Consumer Behaviour

In this chapter, we will study the behaviour of an individual consumer. The consumer has to decide how to spend her income on different goods.  Economists call this the problem of choice. Most naturally, any consumer will want to get a combination of goods that gives her maximum satisfaction. What will be this ‘best’ combination? This depends on the likes of the consumer and what the consumer can afford to buy. The ‘likes’ of the consumer are also called ‘preferences’. And what the consumer can afford to buy, depends on the prices of the goods and the income of the consumer.

Consumer's Affordability  = f( income, price), `\forall` income , price `\in \R_+`

This chapter presents two different approaches that explain consumer behaviour (i) Cardinal Utility Analysis and (ii) Ordinal Utility Analysis.

Preliminary Notations and Assumptions

A consumer, in general, consumes many goods; but for simplicity, we shall consider the consumer’s choice problem in a situation where there are only two goods: bananas and mangoes. Any combination of the amount of the two goods will be called a consumption bundle or, in short, a bundle. In general, we shall use the variable `x_1` to denote the quantity of bananas and `x_2` to denote the quantity of mangoes. `x_1` and `x_2` can be positive or zero. `(x_1, x_2)` would mean the bundle consisting of `x_1` quantity of bananas and `x_2` quantity of mangoes. For particular values of `x_1` and `x_2`, (`x_1, x_2)`, would give us a particular bundle. For example, the bundle (5,10) consists of 5 bananas and 10 mangoes; the bundle (10, 5) consists of 10 bananas and 5 mangoes.