 Hello Learners! We are going to discuss a very fundamental concept of economics which is the theory of consumer behavior. So, before we go into the theory, let us know who is a consumer. The whole society can be divided into two as consumers and producers. So, who are the consumers? Right from cutting up in the morning to the time we go to bed, we use different goods and services. That means we are consumers of these goods and services. So, and you must have learned in your class 11 and 12 what economics means. Economics by definition means the study of mankind in the ordinary business of life. That suggests that economics is ingrained in each every work we do. So, as I said consumers means we are all consumers of goods and services. The most important concept we start with is demand. If we go by definition, the demand for a commodity is amount of it that a consumer can purchase and can take it off from the market at various prices at a given point of time. So, if we say demand in economics it means two important things. First it is the desire to buy a commodity. So, we should first have the desire to buy the commodity and second it is the ability to purchase the commodity. So, usually we have women want many things, but that does not constitute demand in economics. Any person a beggar may want to have a car, he may want to buy a car, but he does not have the ability to purchase a car. So, even his wanting to buy the car does not constitute demand, whereas in economics willingness to buy the good has to be backed by the ability to purchase that good. That means the person who demands a particular commodity means he not only has the desire to buy the commodity, but he also has the capability to buy that commodity. Demand as we understand is determined by different factors. First the most important factor is price. The price of a commodity determines demand. Then we have taste and preference. Taste is another important factor of demand. I think most of you will be having grandparents staying with you. When we talk about taste I think children as you all know love a particular commodity Maggie. So, can you imagine your grandparents also liking Maggie like children do? I do not think they will like our grandparents used to do like detest. I will not say detest, but it was something like they did not like things like Maggie whereas children used to love Maggie. So, as I said price of the good second is the taste and preference. Taste plays a very important role in controlling demand. Another important factor is the income of the person. So, when we want to demand a particular commodity as I have already said demand will require the ability to purchase. So, income of the person constitute another important factor of demand. One additional factor which determines demand is the price of related goods. We are all used to using toothpaste. I think it is a commodity which all of us use. Let us take the example of two important brands Pepsudent and Colgate. Suppose the price of Colgate falls then what will happen? People who are using Pepsudent will shift to the consumption of Colgate as the price of Colgate is now cheaper than Pepsudent. So, that means the price of related goods is also important in determining demand. Then we have complements and substitutes. If a particular toothpaste two toothpaste Pepsudent and Colgate as substitutes then we have complements. A complements means suppose we have a cup, but we do not have tea. So, the cup itself is not useful unless we have tea or coffee in it. That means substitutes and complements also determine demand. So, as a change in any of these factors price, income of the person, price of related goods, price of substitutes and complements in a income of the consumer all these things determine demand. So, if we want to put it in a functional form, we can say demand is a function of it is the function of price. That means we are considering the price of X. It is a function of price. Then it is the income of the consumer if we take it as Y. Then we have the price of complements. Then we have the price of substitutes. All these things taste and preference. All these things will constitute demand as such. A change in any of these factors will lead to a change in demand. So, now we come to another the law of demand. How this concept has been conceptualized in a particular law? According to the law of demand the definition wise the law of demand states that other things being equal if the price of a commodity falls the quantity demanded of it rises. And if the price of the commodity rises its quantity demanded falls. That means here we are having only a functional relationship between two variables. One is the demand and one is the price. That means we will remove these other factors assuming the according to the law of demand assuming that demand is a function of price. Here we say other things remaining constant means the other factors we had taken into consideration other factors remaining constant. So, this is the law of demand. Initially the formula we had shown was what is demand which depends on a number of factors. Now we come to the law of demand which states it is a functional relationship between two variables. One is the demand for the particular commodity and one is the price. Here we assume that other factors remain constant like the income of the consumer, the price of related goods and supplements, substitutes and complements, then taste and preference all those things remains constant. The law of demand can be illustrated through a demand schedule and a demand curve. So, as you see the schedule and if we plot these numbers on a graph you are used to these drawing where we have the x axis and the y axis we have learnt it in school. So, here on the x axis this is the x axis this is the y axis. On this side we measured the quantity demanded what is the amount of quantity and here we write the what is the price. So, if we plot the points of the demand schedule on this graph we find when the price is 12 suppose the price if we start from here 2, 4, 6, 8, 10, 12, 2, 4, 6, 8, 10, 12 and the quantity demanded suppose 10, 20, 30, 40, 50, 60. So, we have written those what is shown in the schedule we have plotted it in the graph. So, when price is 12 quantity demanded is 10. So, this is one point then one price falls to 10 we find that the quantity demanded increases to 20. So, likewise if we go on plotting these points on a graph we find a downward sloping curve. So, what it means? It means that when the price is high the quantity demanded of a particular commodity is less and as the price goes on falling the quantity demanded of that particular good goes on increasing. So, from this graph the demand curve does not tell us what the price is it is not a question of what the price the price is given to us and what is the reaction of the consumer to the change in price that is what the demand curve tells us. So, it is we can say the demand curve is just a graphic statement of quantity is of a good that will be demanded by the consumer at different levels of price. So, as we see this is an inverse relationship between the price and quantity demanded higher the price lower is the commodity and lower the price greater is the quantity demanded. So, here we are talking about one commodity and we are talking about one individual the market demand curve this is an individual demand curve which is similar to a market demand curve. The market demand curve is a summation of all individuals that means, the market demand curve is a lateral summation of the individual demand curves. So, as I have already said there is an inverse relationship between price and quantity demanded. So, why is this curve slopes downward? So, there are mainly two factors which accounts for a downward sloping demand curve. The first is the income effect what is the income effect when the price of a good falls we find that if I buy the same amount of a good some amount of money is left with me and I have I feel richer than I was earlier though I am using the same amount of goods that I have if the price was 2 rupees and I used to buy 5 units of a commodity and now the prices fall into 1 rupee and I buy the same 5 units. But now some amount of money is left behind to purchase other goods or to purchase more quantity of this particular good that means, I have some real income which is left with me after making the expenditure. So, that means, the purchasing power of a person increases with a fall in price of a particular commodity. So, that is the income effect which accounts for the downward sloping demand curve. The second is the substitution effect what is the substitution effect as I had given the example earlier I had talked about toothpaste, pepsudin and colgate. Substitution effect is when one good is used in place of the other good as I said if the price of colgate falls people who were using pepsudin will now shift to the use of colgate as it is cheaper and the price of pepsudin has remained the same. So, we find that there is an increase in the demand of colgate toothpaste because its prices fallen not only because I am using it more but because some people have shifted from the use of pepsudin to the use of colgate. So, these are the two important factors the income effect and the substitution effect which accounts for a downward sloping demand curve. Next, when we talk about the cardinal marginal utility analysis we find that in the downward sloping demand curve marginal ignored the income effect and that is why he could not explain what is termed as the given paradox. He considered only the substitution effect of a change in price and he ignored the income effect but the second theory which was given indifference curve theory given by Hickson and in that theory they used both the substitution and income effect and of the downward sloping demand curve and they could explain properly the given paradox. So, this law of demand can be derived basically from two theories one is the cardinal marginal utility analysis which has two parts one is the diminishing marginal utility and the second is the concept of equimaginal utility and one is cardinal as I said the cardinal marginal utility analysis and the ordinal marginal utility analysis. Today we are going to concentrate only on the cardinal marginal utility analysis. As the name suggests we have three important factors here one is cardinal and one is marginal and utility. These are the three important words which comes in this theory. So, what is utility? Utility means the want satisfying power of a commodity. So, I want certain things because it has some utility for me it has some importance for me I use it I need this white board and I need this marker means this white board and the marker has utility for me that is why I want this these two things while taking a class. Second important concept here is marginal utility what is marginal utility as I said utility is the want satisfying power of a commodity. Marginal utility means the additional utility or the utility from the consumption of the last unit of a good. So, marginal utility has a very important role in economic analysis. Another thing cardinal what is cardinal? Cardinal means everything is quantifiable we can call we can measure utility in terms of numbers that is why it is called cardinal marginal utility analysis. Here utility is taken as subjective it differs from person to person the white board I need here has utility for me for but for you who are who are staying at who are going through a book the book has more utility than a white board or a marker. So, utility is considered to be subjective here where it where the desire to have a particular good varies from person to person. So, now we come to the concept of diminishing marginal utility. The concept is again shown here with the help of a schedule and the graph which we will draw from it. As can be seen from the schedule we have taken the example of cups of tea consumed per day and the total utility derived from that particular consumption and the marginal utility. When the total utility is 12 we find from the consumption of the first cup of tea marginal utility is also 12 as I said marginal utility means the utility from a particular good and one last unit of good or from an additional good. So, to here total utility is equal to marginal utility. So, after the consumption of the second cup of tea the total utility increases to 22 here what is marginal utility marginal utility is 22 minus 12 which is 10 after the consumption of third cup of tea we find that total utility is 30 and marginal utility will be 30 minus 22 which is 8 that means we find that till the consumption of the sixth cup of tea total utility goes on increasing but we find that the marginal utility goes on declining. At the consumption of the seventh cup of tea total utility also declines and from this point of time marginal utility becomes negative. So, 8 cup of tea again total utility will decline and marginal utility as seen in the schedule becomes negative. So, if we plot want to plot these two like the concept of total utility and marginal utility on a graph we find we can write in this manner here again we have the x and the y axis we have two here 1 0 x and y here also here is x and y when shape of the total utility curve as can be seen from the schedule is it is increasing but at a diminishing rate after it reaches a peak that means at the sixth cup of tea after that its total utility starts falling. So, this is the point where if we take it downwards till the marginal utility this is the point where the marginal utility becomes 0 and after that marginal utility becomes negative here remains total utility this is the total utility curve here this side is quantity demanded this is the marginal utility curve this side we again we measure quantity demanded and here we have marginal utility. So, this is this graph describes very well the total utility curve and the marginal utility curve if we take different points here if this is q 1 let me take this this side suppose this is q 3. So, we find that after the consumption of till q 3 amount of quantity total utility reaches its highest level and their marginal utility becomes 0 beyond q 3 amount of a good total utility will fall and marginal utility becomes negative. So, the slope of this total utility curve if we say slope of total utility curve is given by quantity it is and utility divided by the quantity which is the marginal utility. So, if we put it want to put it in the form of a formula we can put it slope of the total utility curve is given by d u by d q where u is utility q is the amount of quantity demanded which gives us marginal utility. As we are now clear about the concept of total and marginal utility we come to the concept of duty marginal utility analysis and what were the assumptions taken formulation of this particular theory. The first assumption the basic premise of the first cardinal marginal utility analysis is utility is cardinally measurable as I have just mentioned the utility derived from a particular good cardinally measurable means the utility derived from a particular good can be measured in terms of units. Suppose I have an apple I can say I derive five units of utility from that apple. Suppose I take an ice cream I can say I am deriving four units of utility from the consumption of the ice cream cardinally measurement means I can specify the number of utility I derive from the consumption of a particular good. The second assumption is the utility derived from a particular good is independent that means the utility I derive from this whiteboard and pen is independent of the utilities I derive from other goods and services. Every good will have a particular utility utility from the whiteboard suppose is four utility from this pen is three utility from the having this good room in which I am taking the class suppose this is 10 and my total utility will be a summation of 10 plus 4 plus 3 that means all the goods and services that I am using will give up will give the total utility I derive from the consumption of all these goods and services. The third and a very important assumption of this theory is marginal utility of money is assumed to be constant. Here marginal utility analysis assumes that marginal utility of every commodity declines with more and more of it however the marginal utility derived from money is assumed to be constant whether I have more money or less money the amount of money that I have is independent that means it is constant of the amount of money that I have. The fourth important assumption is that the cardinal marginal utility analysis is an introspective method that means I can understand what is going on in the minds of others from my own observation and experience I can understand other people's feelings also. So, these are the four basic assumptions of the cardinal marginal utility analysis. As I had mentioned in the first part of my lecture we have two laws of cardinal marginal utility analysis one is the law of diminishing marginal utility and one is the principle of equi marginal utility. What does the law of diminishing marginal utility state? This law states that the additional benefit which a person derives from a given increase of a stock of his thing diminishes with every increase in the stock that he already has that means diminishing marginal utility means while ones are unlimited in economics we always say people have unlimited ones but the want of a particular good is always constant constant means is goes on declining. Suppose I have one book to go through this one book in which I get this lecture that has utility for me but and again I get another book which deals with the same concept the utility from the second book will be definitely lower than the utility from the first book because I already have one book that means the utility of a particular thing I have diminishes with every increase so that is the basic concept of the law of diminishing marginal utility. What is the law of equi marginal utility state? This principle of equi marginal utility states a consumer maximizes his utility by allocating his given income in such a way that the marginal utility of the last rupee spent on each good he consumes is the same. Suppose I have two commodities then what will happen? I will use my money in such a way that the utility I derive from the last rupee on each good will be the same that means that will be a constant. Suppose I have two goods marginal utility of x and divided by x marginal utility of y divided by price of y is a constant that means this is the principle of equi marginal utility which state that I will divide by money income between the between these two goods x and y in such a way that the marginal utility of the last rupee spend on both the goods is the same. This is the concept of equi marginal utility. So, again this concept of equi marginal utility can be shown by the by a schedule and a graph. Here we have two schedules in the same slide where we find is the marginal utility of goods x and y and in the second schedule we have marginal utilities of expenditure that means we have m u x in the first one and the second one marginal utility of x divided by price of x. So, here suppose we take the price of x as rupees 2 per unit rupees 2 per unit price of y as rupees 3 per unit and total income is equal to what income I have is rupees 24. So, I will divide my income between these two goods x and y in such a way that the utility derived from the last rupee on x and y will be the same. So, in the second schedule we find that when the price is 10 mean when utility derived is from x is 10 the price is 2 we get 5 as can be seen from the schedule that means when I consume 6 units of good x then my marginal utility is 5 whereas when I consume this will be y price of y here 5 is 15 since the price is 3 this is again 5 that means I will be in equilibrium when I buy 6 units of good x and 4 units of good y. So, I think this schedule and this simple arithmetic will help us to understand that when is the consumer in equilibrium according to the equimarginal utility analysis. So, when we first started we first started this lecture with a demand curve now we will we will derive the demand curve first initially from the concept of diminishing marginal utility. So, if we do it today help over diagram we can do it in this way where where we have in this is quantity this is again x and this is y this is quantity demanded of x quantity x we are demanding and here we are measuring marginal utility that means we are going to derive the demand curve with the help of marginal utility analysis on this side we again we have the demand curve we will derive the demand curve here. So, as we all know the consumer is in equilibrium in respect of the goods purchase when marginal utility of the commodity is equal to the price. So, we have a downward sloping marginal utility curve marginal utility of x suppose the marginal utility is this. So, and the price is this what will be the quantity demanded then we have this demand curve. So, here this is marginal utility 1 then we take another example the marginal utility of 2 that means marginal utility has declined and we get another point here this is p 1 this is p 2 then suppose we take another point marginal utility 3 here we have this is q 1 q 2 q 3 p 1 p 2 p 3 this is the demand curve this is the marginal utility curve as we see from these two diagrams the left hand side of the marginal utility curve has a negative part also which does not come in the demand curve the demand curve is always positive demand can never be negative. So, here this is the demand curve which we have derived from the marginal diminishing marginal utility analysis which shows that when price of the good falls downward sloping marginal utility curve implies that the consumer must buy more of the goods. So, that the marginal utility falls and becomes equal to price. So, now we derive the demand curve from the law of equimarginal utility. So, when we when we draw the same we derive the same graph, but in a slightly different manner because we are now talking about the equimarginal utility where we are considering two or three different goods. So, suppose we have this graph here and we have the demand curve. So, we have marginal utility 1 marginal utility 2 and if we go a bit higher we have marginal utility 3. So, this is again x and this is y this will be again this will be x and this will be y here we have the marginal utility 1 marginal utility 2 marginal utility 3 here and the marginal utility of money that is lambda is constant equimarginal utility. So, when we draw this on the downward part of the diagram we get a downward sloping demand curve which is the demand curve at different price on the commodity. So, this is p 1 p 2 p 3 where we are measuring price here. So, we are measuring marginal utility here this is quantity demanded again here is q 1 q 2 q 3. So, this is quantity demanded which we are measuring on this part. So, this means that the this theory according to this theory we write marginal utility of x divided by price of x is equal to marginal utility of y divided by price of y is equal to then we have some other commodities we can extend it to a number of commodities where we find marginal utility of n number of commodities price of n and we find it equal to lambda. That means, this concept of equimarginal utility can be can be extended to a number of commodities where marginal utility derived from the last unit of a commodity will always be the same for each and every good consumed by a consumer. So, as we now we have almost come to the end of this cardinal marginal utility analysis where we had studied about the law of diminishing marginal utility and the law of equimarginal utility. Now, we come to the criticisms what are the criticisms leveled against this theory. There are a number of criticisms where we will discuss only a few of the criticisms which have been given against this theory. The first criticism of the cardinal marginal utility analysis is cardinal measurement of utility is unrealistic. The later economist which came in after Marshall criticized Marshall for assuming utility to be cardinally measurable. That means, as I had already said utility is taken as like in number we can measure utility in terms of numbers 1, 2, 3, 10, 40, 50 whatever the utility we derived we can use it as in numbers. But in actual practice can we measure utility in terms of numbers it is very difficult to do so. So, in actual practice utility cannot be measured in such quantity as utility is considered to be a subjective thing. That means, I can say I like this thing, but how many utilities I derived from that particular good is difficult to say. That was the first serious drawback or serious criticism leveled against the theory of consumer good or cardinal marginal utility analysis. The second criticism leveled against this theory is the hypothesis of independent utilities is wrong. As we had discussed during the course of a lecture we had said that the utility derived from a particular good is independent of the utility of the other good. That means, the utility I derived from this board is independent of the utility I derived from this room, but does it usually actually happen. If I have a glass and I do not have water in it the utility of the glass I have no utility for the glass. That means, how can I say that the utility of all things are independent actually they are dependent. I have a pen, but without a refill or without ink in it. That means, again the utility of the pen the pen is the do not have any utility unless I can write something with it. So, these are complementary goods, glass with water, pen and ink, those are compliments and something like tea and coffee. The utility I derived from tea is maybe something different from the utility I derived from coffee. They are substitutes, but we cannot say that the they are independent of each other. So, that was the second serious criticism leveled against Marshall's cardinal utility analysis. The third criticism is the assumption of constant marginal utility of money is not valid. Our basic premise of the theory was the concept of diminishing marginal utility which states that as a person has more and more of a good, the utility of that particular good declines. But Marshall assumed that the marginal utility of money remains constant. What it means? It means whatever is the amount of money I have and addition to it will remain the same at all times. But this actually does not happen. When the price of a good falls as I had already explained that which is the income effect, the real income of the person even if I have the same income I feel I am richer by some amount of money. Why? Because now I am spending less on that particular good whereas earlier as the price was high I could buy less quantity at that price. Now either I can buy more of that commodity or I can save some money because the price of that particular good has fallen. So, if we say the concept of we are measuring all the marginal utility of different goods and services with the marginal utility of money and if the marginal utility of money itself is not constant, where is the measuring rod for money? Definitely this is a serious criticism level against this theory. The last one which is related to this constant marginal utility of money is the Giffen paradox. Martial could not explain the Giffen paradox. What is the Giffen paradox? We find that initially when we drew a demand curve we found an inverse relationship between price and quantity demanded. It means that the higher the price lower is the quantity demanded. But there are certain goods where there is a positive relationship between price and quantity demanded means when the price falls the demand for it also falls and when the price rises the demand for it also rises. So, that is the Giffen paradox. So, this Giffen paradox could not be explained by Martial because he ignored the income effect of a change in price. And as I have already said in a Giffen good is something where quantity demanded varies directly with price. So, these are the four criticism leveled against this theory. So, this sums up the cardinal marginal utility analysis where we first talked about the downward sloping demand curve. We talked about the marginal utility analysis and we explained the cardinal marginal utility analysis with two principles the principle of diminishing marginal utility and the principle of equimarginal utility. We have derived the demand curve from these two principles and in the last part we have discussed the criticisms leveled against the cardinal marginal utility analysis. Thank you.