Economics

• The consumer attains equilibrium at the point where the budget line is tangent to the indifference curve and MU x / P x =MU y /P y = MU z /P z.
• Theory of Demand and Supply Unit 2: Theory of Consumer Behaviour focuses on explaining the meaning of utility, how consumers try to maximize their satisfaction by spending on different goods, the law of diminishing marginal utility with examples, consumer surplus with examples, indifference curve and the price line, and how these help in explaining consumer equilibrium.
• In economics, the term 'want' refers to a wish, desire or motive to own or/and use goods and services that give satisfaction.
• Wants may arise due to physical, psychological or social factors.
• Since the resources are limited, we need to make a choice between the urgent wants and the not so urgent wants.
• All wants of human beings exhibit some characteristic features.
• Wants are unlimited in number.
• All wants cannot be satisfied.
• Wants differ in intensity.
• Some wants are urgent, others are less intensely felt.
• Each want is satiable.
• Wants are competitive because resources are scarce in relation to wants.
• Wants are complementary because some wants can be satisfied only by using more than one good or group of goods.
• A particular want may be satisfied in alternative ways.
• Wants are subjective and relative.
• Wants vary with time, place, and person.
• Some wants recur again whereas others do not occur again and again.
• Indifference curves can never intersect each other: No two indifference curves will intersect each other although it is not necessary that they are parallel to each other.
• Consumers use up their entire nominal money income to purchase the commodities: Consumers use up their entire nominal money income to purchase the commodities.
• In case of intersection the relationship becomes logically absurd because it would show that higher and lower levels are equal, which is not possible.
• The most important constraint all of us face in deciding what to consume is the budget constraint: Consumers almost always have limited income, which constrains how much they can consume.
• Consumers maximize their well-being subject to constraints: Consumers maximize their well-being subject to constraints, with the most important constraint being the budget constraint.
• A consumer’s choices are limited by the budget available to him: A consumer’s consumption possibilities are the set of all consumption bundles that can be consumed given the consumer’s income and prevailing prices.
• An indifference curve will not touch either axes: An indifference curve will not touch the X axis or Y axis.
• A budget line shows all those combinations of two goods which the consumer can buy spending his given money income on the two goods at their given prices.
• A higher indifference curve represents a higher level of satisfaction than the lower indifference curve: A higher indifference curve shows a higher level of satisfaction than a lower one.
• Wants may become habits and customs.
• Wants are affected by income, taste, fashion, advertisements and social norms and customs.
• Wants arise from multiple causes such as physical and psychological instincts, social obligations and individual’s economic and social status.
• In Economics, wants are classified into three categories, viz., necessaries, comforts and luxuries.
• Consumer surplus is important when a firm considers raising its product prices because customers who enjoyed only a small amount of surplus may no longer be willing to buy products at higher prices.
• The concept of consumer surplus is often argued to be hypothetical and illusory because it is difficult to measure the marginal utilities of different units of a commodity consumed by a person.
• The consumer surplus derived from a commodity is affected by the availability of substitutes.
• Consumer surplus is represented by the triangular area below the demand curve and above the price line.
• Understanding the nature and extent of surplus can help business managers make better decisions about setting prices.
• The concept of consumer surplus can be accepted only if it is assumed that utility can be measured in terms of money or otherwise.
• A higher price results in a smaller consumer surplus and a lower price generates a larger consumer surplus.
• Consumer surplus is a measure of the welfare that people gain from consuming goods and services.
• In the case of necessaries, the marginal utilities of the earlier units are infinitely large, resulting in an infinite consumer surplus.
• Consumer surplus usually acts as a guide to finance ministers when they decide on the products on which taxes have to be imposed and the extent to which a commodity tax has to be raised.