2. Theory of Consumer Behaviour
The chapter delves into consumer behavior, specifically focusing on how individual consumers make choices regarding spending their income on goods that maximize their satisfaction. It introduces the concepts of Cardinal and Ordinal Utility Analysis, explaining how preferences and prices impact consumer decisions. The chapter concludes with an understanding of demand, elasticity, and the factors influencing consumer choices in the market.
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What we have learnt
- Consumers aim to maximize satisfaction given their income and preferences.
- Utility can be measured cardinally or ordinally, influencing demand behavior.
- Demand for goods typically inversely relates to their price, adhering to the Law of Demand.
Key Concepts
- -- Cardinal Utility Analysis
- A method of measuring utility in numerical terms, assuming levels of satisfaction can be expressed quantitatively.
- -- Ordinal Utility Analysis
- A representation of consumer preferences where the consumer ranks various bundles of goods without measuring utility in numbers.
- -- Indifference Curve
- A curve that represents different bundles of goods among which a consumer is indifferent; each point on the curve indicates the same level of utility.
- -- Budget Set
- The collection of all possible bundles of goods that a consumer can purchase given their income and the prices of those goods.
- -- Demand Curve
- A graphical representation showing the relationship between the price of a good and the quantity demanded, typically sloping downward.
- -- Price Elasticity of Demand
- A measure of how much the quantity demanded of a good responds to a change in its price, defined as the percentage change in quantity divided by the percentage change in price.
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