Economics Basics: Theory of Consumer Behavior

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Read INTRODUCTION TO ECONOMICS

Economics Basics: Theory of Consumer Behavior

Consumer Budget :   A consumer having fixed budget to buy a set of goods is consumer’s budget. Its exchange value of a consumer for a set of product and a particular time.
Example: In case of Richa , her pocket money was Rs 2000 which was her monthly budget.

Budget Set:  Set of products or bundle of products which a consumer can exchange or get under restriction of his/her budget is called Budget set.

Example

In case of Richa : She prioritised as follows

  1. Get her spectacles.
  2. Transportation for 30 days.
  3. Buy 2 Book.
  4. Birthday of Brother will be settled in about Rupee 500.
  5. Go for a movie with two friends.

Other sets which Richa could have got in Rupee 2000 are as follows

  1. Get her spectacles.
  2. Transportation for 30 days.
  3. Buy 2 Book.
  4. Birthday of Brother will be settled in about Rupee 700.
  5. Go for a movie alone.

And many more such sets according to her preference under Consumer budget of Rupee 2000.

Rupee 2000 ≥ P1x1+p2x2+p3x3+pnxn in case of Richa

Where p1 , p2 till pn  are set of products and x1 , x2 till xn are cost for respective product.

Budget line:  The set of products or bundle of Products which are selected by consumers on line of Budget is called Budget line.

In case of Richa any number of variation of Richa’s selection of products which cost exactly equals to Rupee 2000 is budget line.

Capture

Challenges in Budget set

P1x1+P2x2+Pnxn > M

Change in Budget Set

P1x1+P2x2+Pnxn > M

P1x1+P2x2+Pnxn < M

Monotonic Preference

When a consumer get satisfied with one set of product more than other set of product in terms of volume as in 1 set volume is more and other is equal then this sort of preference is known as Monotonic Preference.

Price Ratio and slope of Budget line

Substitution Between Goods

Amount of goods consumer is willing to give up for another goods is substitution of goods.

Two sets of goods

Set 1:  (x1, x2)

Set 2:{ (x1+Δx1) + (x2+Δx2)} where Δx1 > 0 and Δx2 <0

Rate of substitution = Δx2/Δx1

Diminishing rate of Substitution:  Amount of goods x1 we are using more to respective decreasing of goods x2 is rate of substitution.

Indifference curve:  

Capture

Plutus Academy has contributed these notes, one of the top coaching institute for  SSC and IBPS exams.

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