 We will introduce the third topic under this model theory of demand that is theory of consumer behavior today. And the session outline for this consumer behavior will be, we will first look at generally what are the preconditions or assumptions for consumer preferences, what is utility analysis, both cardinal and ordinary utility analysis. Then we will discuss about the indifference curve, budget line and the consumer equilibrium. So, if you remember in the very first class, we talked about the optimization problem of all the market agents or all the economic agent. So, like for producer always the optimization problem is to optimize or maximize the output. Similarly, for the consumer always is optimization problem is to maximizing the total utility or the maximizing the total satisfaction when he or she consumes the various goods and services. So, today's focus in on consumer optimization problem because we are talking about specifically the theory of consumer behavior. And what is consumer optimization problem? Consumer optimization problem is to maximize the satisfaction from its limited money income or the limited budget available to him, how he can maximize the total satisfaction from the various goods and services what he consumes. Now, what is the constraint over here? The optimization problem is to maximize the satisfaction, but the constraint over here is to the income constraint or the budget constraint because whatever the consumer wish to buy it is not possible always because there is always a value associated with each of the goods and services and there is a money income required to consume the different goods and services. So, the optimization problem is to maximize the satisfaction or the maximization of the utility by consuming various goods and services. And here the constraint is the spending on the goods should be exactly equal to the consumers money income. Now, what are the assumptions to be practiced here? We assume that the when the consumer are making decision regarding consumption of goods and services, we assume that the buyers are completely informed about the ranges of a range of products available. What are the products available in the market? Then what is the market prices of all the products? Like what is the value of the products? Now, what is the capacity of product to satisfy? This is a subjective term, but we can always bring it to a monetary firm suppose if you are spending 10 rupees or 100 rupees on a goods, whether the satisfaction or whether the usefulness of the product is worth of the value of the product or not. Like if I am spending 100 rupees on consuming a product, I always look for whether the product has the usefulness or not. Is it worth to produce 100 rupees or not? So, the first the consumer or the buyers has to be information about all the products available in the market. What are the market prices available for all the products or at what price all the products are available? The capacity of the products to satisfy and what is the consumer's money income? This requires that all the consumer can rank all consumption bundles based on the level of satisfaction they would receive from the different unit of consumption. Like if the products are 10 or the products are 20, the consumer can rank all the consumption bundle based on their level of satisfaction. Suppose there are 10 products available to me and on the basis of my income I can spend only on 2 or 3 products. Now what is your role of the rational consumer here? The role of a rational consumer here is to first rank on the priority basis that what is the requirement and second is that what is the usefulness I am getting from each of this product. And after ranking the various product then only I will see how much I can buy from this different kind of products. So, that requires the consumers can rank all the consumption bundle based on the level of satisfaction they would receive from the different unit of consumption. And all this information will help them to rank all the consumption bundle like range of product available, price of all the products, the capacity of the product to satisfy and what is the consumer's money income. There are few assumptions when it comes to the consumer theory or the theory of consumer behavior. First one is the completeness. For every pair of consumption bundle A and B, suppose there are two consumption bundle A and B and may be consumption bundle A consider different category of goods, consumption bundle B consider different bundle of goods or the different combination goods. The consumer can say one of the following either A is preferred to B, B is preferred to A and the consumer is indifferent between A and me. What does this imply? This implies that whether it is A or whether it is B the consumer is getting the same level of satisfaction or the same level of usefulness after consuming the products. That is the reason the first one is the since the consumer has the information about what are the goods available under bundle A, what are the goods available under bundle B and on that basis the first assumption goes that if A is preferred to B and B is preferred to A the consumer is also indifferent between A and B. Then we have this transitivity. Under transitivity if A is preferred to B and B is preferred to C then A must be preferred to C. So, here A is one consumption bundle, B is another consumption bundle and C is another consumption bundle. So, transitivity assumptions say that if a consumer preferred A, consumer preferred B to A or B to C or C to B then A must be preferred to C because A is preferred to B, P is preferred to C and A must be preferred to C. The third assumption or the most important assumption in case of consumer theory if you look at the non-satiation it means the consumer never gets satisfied with the consumption of goods and services and more of good is always preferred to less. The consumer never says that I have enough of this I am not going to demand for more, I am not going to consume more. So, always they prefer a combination of more goods and services which the consumption bundle consists of rather than less goods and services what the consumption bundle consists of. So, more is always better that is according to the non-satiation assumption of the consumer theory. Then we will come to the core of this consumer theory because all the if you look at the basis we are always using the word the consumer should get satisfaction, the consumer should get usefulness, the consumer should make a decision on the basis of the satisfaction what I receive from the goods and services after consuming this. So, the core for this is that how to identify how to measure the satisfaction what the consumer gets from the product the basis for this is the utility. So, we will come to the utility analysis now we will define what is utility we will see what is a utility function and how this utility get used when the consumer takes a decision regarding the product regarding buying a typical product or not. So, utility is this the benefit what the consumer gets from goods and services they consume. So, when they consume a goods and services what about the benefit or what about the usefulness of the product that becomes as the utility. So, basically it is a numerical score representing the satisfaction that a consumer gets from given consumption basket. So, it is like if I have a consumption basket which consists of 10 goods after consuming the consumption basket if I am able to give a numerical score if I am able to identify what is the benefit associated with the consumption basket then the consumption basket has the utility. So, basically this is the benefit what the consumer gets from goods and services after consuming and generally you can convert it to a numerical score which represents the satisfaction that a consumer gets from a given consumption basket. So, if you take an example if buying 3 copies of books give more happiness than buying a shirt it can be said that books give you more utility than shirt right. There are two food item and if you are food item A and B if you get more satisfaction in A as compared to B you can always say that A has more utility than in compared to B, but this utility is always a relative concept it is not that all the consumer they are going to get the same level of utility by consuming A may be some consumer they get more utility when they consume B and for them B is always having a major more utility as compared to the A. So, utility is the benefit what the consumer gets after consuming a product or consuming a consumption basket and it can be converted into a numerical score which represents the consumer satisfaction and on that basis they can take a decision whether to buy this product whether to consume this product or not. So, what is a utility function if you are making it to a mathematical mathematical relationship this utility and the consumption of goods and services. So, utility function is an equation that shows an individual perception of the level of utility that would be attained from consuming each considerable bundle of goods. So, whatever we are explaining learning the numerical score of the total satisfaction same way when you are bringing down its to a mathematical equation utility is the function of the different goods or the function of the level of utility of the different goods. So, u here is the utility x and y is the two goods what the consumer is consuming. So, the total utility what the consumer is getting is the utility of the x and utility the y or we can always say that this is the satisfaction what the consumer gets after consumption of both the goods that is x and y. There are two way to measure this utility one is cardinalist approach and second one is the ordinalist approach. So, when utility can be measured in subjective unit according to the cardinalist approach and according to ordinalist approach utility cannot be measured, but can rank only in order of preferences. So, in case of cardinalist approach the core is again utility can be measured utility can be quantified whereas, in case of ordinalist approach utility cannot be measured rather it can be ranked in the order of the preferences. The unit by which we can measure the utility under cardinalist approach is utils that is called utils the unit of measurement under cardinalist approach is util whereas, in case of ordinalist approach we cannot quantify it or we cannot measure it rather we can rank them in the order of the preferences. Like if you are taking the example of maybe having food in different restaurant. Now, how it works for post the cardinalist approach and the ordinalist approach? In case of cardinalist approach I can say if I have taken food in three different restaurant I can say after having food in restaurant one I get 10 units of utils after having food in restaurant two I get 12 unit of utils and after having food in restaurant three we can get I get 8 units of utils this is cardinalist approach. But how this example can be taken in the ordinalist approach? After having food in all these three restaurants if I am asking to give my preference I will give always third is the first preference second is the second preference and first is the first last preference because I have got more satisfaction in having food in third restaurant. So, one is assigning some unit in term of utils that is cardinalist approach and second one is that on the basis of the preference I can rank the different goods or I can rank the different products. But if you look at the basis is again same in first case again it is a total satisfaction represented in utils term and second is again the basis is total satisfaction which is represented on the basis of a ranking. So, if you take an example now suppose there are 5 goods x 1, x 2, x 3, x 4 and x 5 and the second column gives us the utility what we get that is in case of x 1 we get 14 utility of utility, in case of x 2 3 utils of utility, in case of x 3 10 units of utility, in case of x 4 8 units of utility and in case of x 5 17 units of utility. So, if this is the utility what I am getting the first column always gives us the cardinalist approach because it is assigning a number to the satisfaction what the consumer is getting from the different unit of goods. But the second one the second column that is rank order in this case if you look at this is the example of a ordinalist approach because here the number is not given for each goods rather it is prefer according to the satisfaction or according to the preferences. So, in this case if you look at x 5 is given as the first preference x 4 is given as the fourth preference x 3 is given as the third preference x 2 is given as the fifth preference and x 1 is given on the second preference. It means according to the priority according to the preferences or may be according to the satisfaction received from each of the goods the goods are ranked and in case of first one in case of cardinalist approach it is like whatever the total satisfaction the consumer is receiving after consuming each goods and services. So, if you take an example that measuring utility in utilities that is again example of a cardinalist approach like if you are taking the example that jack derives 10 utilities from having one slice of pizza, but only 5 utilities from having a burger this is the example of a cardinalist approach. And in case of ordinalist approach we can always take the example like Jill prefers a burger to slice of pizza then slice of pizza to a hot dog. So, in the first case in case of cardinal if jack is the consumer we can always quantify in this case that what is the utilities he is getting when he is consuming one slice of pizza and what is the utility he is getting when he is consuming one burger, but when it comes to ordinalist approach we cannot quantify what is the utility rather we can always prefer like if you look at Jill here is the consumer Jill prefers a burger to a slice of pizza it means he assign more utility more satisfaction after having a burger than a pizza and a slice of pizza to a hot dog. So, if it is a between a comparison between a hot dog and slice to slice of pizza again he give more importance to slice of pizza because he gets more satisfaction from slice of pizza than to the hot dog. So, in the second case Jill is prefering one product over another product on the basis of the satisfaction he receives or on the basis of the satisfaction on the basis of the utility what he gets from the different quantity of or different types of goods and services. Now, so when it comes to again the measurement of utility there are two approach one is cardinalist approach second one is the ordinalist approach. If you look at often consumers they are more are able to more precise in expressing their preferences like in the previous example if you look at Jill is willing to trade a burger for four hot dogs, but she will give up only two hot dog for a slice of pizza. So, look at the trade now they are very all the rational consumer there are very precise in expressing their preferences which products they want and which products they can give up. So, if you are taking a case of Jill he is willing she is willing to trade a burger for four hot dogs, but she will give up only two hot dogs for a slice of pizza. She is ready to forego four hot dog for one burger, but two hot dog only for the slice of pizza. It means he prefers burger more than pizza and we can infer to that to Jill a burger has two eyes as much as utility as slice of pizza and a slice of pizza has two eyes as much as utility of the hot dog because he is exchanging four hot dogs for one burger and two hot dogs for one slice of pizza. So, when it comes to measurement of utility for him the highest utility is always the burger the second highest utility is the pizza and third utility is the hot dog because he is ready to sacrifice four hot dogs for one burger two hot dogs for one slice of pizza. So, burger has twice as utility as the slice of pizza and slice of pizza has twice as utility as the hot dog and he can when it comes to ranking the preference he can always say the Jill can always prefer the burger then pizza and then the hot dog. Then we will see what is the total utility we will introduce two new concept here one is total utility and second one is the marginal utility. Now, what is total utility? Total utility is the total utility of a consumer derives from the consumption of all the units of goods and services or a combination of goods over a given consumption period. Suttery paribas all other things constant total utility is nothing but the total utility of the consumer what he or she gets after consuming the all the units of goods and services and what is marginal utility? Marginal utility is the additional utility that a consumer derives from the consume after consuming goods and services any additional unit of the goods and services. So, marginal utility is the utility a consumer derives from the last unit of consumer good see or he consume during a given consumption period Suttery paribas all other things remaining constant. So, if you plot it the total the total utility curve is or the from the total utility curve we can get the marginal utility curve and this is nothing but the change in the total utility when there is change in the quantity of the consumption. So, if there are 10 you need to consume the marginal utility between the 9th and 10th is always what is the last additional unit of utility the consumer has added to the total utility after consuming the last unit of the product. So, total utility is the sum total of the utility what the consumer gets after consuming all unit of goods and services and marginal utility is always the additional utility to the total utility when the consumer consuming one more additional unit of the goods. So, if you graphically represent then total utility is generally take a inverted u shape initially it increases reaches the maximum then it decreases and marginal utility is generally the slope of the total utility. So, that is the reason if you look at marginal utility start at a higher level and then slowly slowly decreases and then it reaches 0. We will see why the shape of the total utility is like this why it increases at the beginning and why it decreases at the may be after reaching the threshold level and to a simply may be a simple version of this marginal utility is thus the slope of the total utility. So, initially the marginal utility if you look at marginal utility decreases and then it reaches 0 and then it goes to negative. That means, there is a decreasing slope of total utility even if total utility is increasing it is increasing at a decreasing rate then when it decreasing then marginal utility goes on a negative direction. Now, what are the assumption of this total utility curve as the quantity consumed per period increases total utility increasing at a decreasing rate. So, when there is more and more quantity if the consumer is consuming more and more of the goods generally the total utility increases at the decreasing rate. So, utility some utility the benefit the consumer is getting, but whatever he was getting earlier that becomes less now. When total utility reaches maximum it attains the satiation quantity. So, if you look at the top point may be when it has stopped increasing the that point the total utility reaches maximum and that is the satiation quantity or that is the threshold level up to which the consumer gets the satisfaction. Total utility declines if more quantity consume after the satiation quantity. So, if you look at how this total utility and marginal utility they are related here suppose if you are considering total utility this is the quantity of the good getting produce. So, initially it increases then it reaches the maximum and then it decreases. So, corresponding to this our marginal utility initially decreases. So, corresponding this when this is maximum we get a zero marginal utility and after that this is negative. So, how these two are related initially total utility increases increases at the decreasing rate reaches the maximum and after this total utility decreases. Corresponding to this the marginal utility is decreasing up to the point total utility is increasing at the decreasing rate. Marginal utility is nothing, but the slope of the total utility. So, if the slope is decreasing similarly the marginal utility has to decrease and that is the reason marginal utility is reaching at this point zero. Then when it is maximum marginal utility is zero and when it is decreasing marginal utility is become negative. So, from there the concept of actually the diminishing marginal utility comes and what is diminishing marginal utility or why we get a negative slope of the total utility. Over a given consumption period the more of a good the consumer has or has consumed the less marginal utility and additional unit contributes to his or her overall satisfaction. Alternatively we could say over a given consumption period as more and more of a good is consumed by a consumer beyond a certain point the marginal utility of additional unit is begin to fall. So, if you look at why the total utility is decreasing like take a small example of the consumption of coffee or tea. Maybe when you take the first cup of tea or first cup of coffee you get a maximum usefulness or the maximum satisfaction from this product. Then when you have the second cup of coffee again you get some amount of some amount of the benefit or some amount of the satisfaction, but if you compare between the first cup of the tea of the day and the second cup of the tea of a day then again there is a difference because whatever the satisfaction you have got in the first cup you will not get in the second cup. Then maybe again it happen again you are going to have the third cup of tea or third cup of coffee within a specified time period. So, if the time period is fixed and the same amount of product you are having then whatever the satisfaction you are getting at the initial consumption you are not getting that in the following consumption where a following consumption when you are having more and more of that. Similarly, if you can take an example of watching a movie or reading a book. When you first time read a book you get a maximum utility because this is a newer one and you get to know all the thing in a new version. When you watch a movie for the first time again you like it most maybe you have like something that is the reason you are watching the movie for the second time third time or so on, but whatever the satisfaction you have got or whatever the utility you have got in the first unit of consumption that is always higher and when you are going on watching the same movie watching the same book or maybe consuming the same product the marginal utility goes on decreases and finally it reaches a zero. So, at a point of time you can say that I am not going to have any more tea today because I have had enough. At any point of time you can say that I am not going to watch this movie for next three months next one year next two year because I have watched it for 10 times or 12 times or I can say that you can say that I am not going to read this book for next few weeks because I have had enough in last few weeks. So, if it is a specific time specific product the utility decreases when we are consuming more and more of it. Now, what are the preconditions in which case the law of diminishing marginal utility is valid the unit of consumption must be standard one means if you are taking the example of a book if you are taking the example of a movie if you are taking the example of a coffee or tea. In this case if the first time you are having just half cup of coffee second time you are having a quarter cup of coffee third time again you are having less of it the possibility is that you may get still the same amount of satisfaction what you would have got in the first cup of coffee. So, the unit of consumption should be standard one otherwise this law of diminishing marginal utility is not going to be valid or like if you take the example of a movie or if you are taking the example of a book you can always say that you have to read the book full you have to watch the movie full not only part of it if you are watching part of it again you are you can get the same utility level if you are watching a different part maybe in next few hours or next few days. So, unit of consumption has to be standard one then only the diminishing marginal utility has to be valid consumption must be continuous you cannot give a gap. Suppose you are having one cup of tea in the morning and one cup of tea in the afternoon again you will get the same level of satisfaction. So, in this case law of diminishing marginal utility is not valid because the consumption is not continuous if you are giving a gap the possibility is that you are getting the same level of satisfaction again. The taste and preference of the consumer should remain unchanged during the course of consumption. So, if you are if you are generally having coffee or if you are generally having tea the your taste should not change during the course of consumption if you like the product then only you are consuming it. So, that should be there till the end of this consumption period the good should be normal not addictive in nature like if I am addicted to coffee if I am addicted to tea if I am addicted to smoking or if I am addicted to liquor I will go on consume I will not get the less satisfaction because I am addicted to it someone is addicted for smoking. So, the more they consume more satisfaction they get someone is addicted to tea more they consume more they get satisfaction someone is addicted to liquor more they consume more they get the satisfaction. In this case the law of diminishing marginality is not going to valid because this goods are not normal they are addictive in nature. So, one of the precondition for the application of law of diminishing marginal utility is the good should be normal not addictive in nature. So, like if you are taking a specific example you are taking two products one is the maybe the paper vending machine another is the candy vending machine. So, if it is a simple question how many people take more than one paper from the vending machine maybe the answer is none of them because if you take the newspaper it is a durable goods you go on reading for the throughout the day you do not require a second set of newspaper, but when it comes to candy maybe again people they go on dispensing candy because maybe they are having one now they are having maybe one later. So, in both these cases if you look at the there is a case of the diminishing marginal utility, but in case of diminishing marginal utility that comes at the very first unit in case of the newspaper, but for candy it comes a little later because they go on consuming candy till the time the marginal utility is not reaching 0, but if you have a already taken newspaper from the vending machine the second one is again not generate any level of utility because you are always having the similar one for the first time you are not going to consume again and again the same newspaper even if you are getting a chance to get it from the vending machine. So, these are the typical examples that how the law of diminishing marginal utility is valid as the consumer consume more and more of a specific product the utility generally goes on decreasing.