consumer preference and coice
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Consumer preferenceand choice
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What is consumer
preference?Prioritization of wants on the basis of
Urgency.
Intensity of such wants.
Paying capacity.
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Why study?Helps in identifying marketing variables:
Product offering.
Pricing strategy.
Promotion.
Transportation and communicationetc
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Two schools of thoughtCardinal Utility Analysis.
Ordinal Utility Analysis.
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Understanding consumer
choiceDepends upon
Demographic factors.
Psychographic factors.
Geographical factors.
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Three basic assumptionsPreferences are complete.
Preferences are transitive.
Consumers always prefer more of any good toless.
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UtilitySatisfaction a consumer derives out of
consumption of commodity.
A rational consumer aims at maximizinghis/her utility from consumption of differentcommodities, subject to budget constraint.
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Cardinal UtilityUtils the unit of utility.
Commodities can be assigned with no. of utils.
Utility is additive in nature.
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Total utility and marginal
utilitySum total of utility levels out of each unit of a
commodity consumed within a given period oftime.
Marginal utility is the total utility of theadditional unit consumed of the commodity.
MU = TUn TUn-1
MU= TU/ Q.
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Law of diminishing
marginal utilityMarginal utility for successive units consumed
goes on decreasing.
Assumptions:The unit of consumption is standard.
Consumption must be continous.
Multiple units of the commodities should beconsumed.
The taste and preference of the consumershould remain unchanged during the course of
consumption.
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Law of equimarginal
utilityHow a consumer would spend his income on
different commodities?
Equi-marginal principleMUa \ Pa = MUb \ Pb = MUc \ Pc = MUn \ Pn
If price of a good changes - reallocate income
If income is fixed
utility is maximised when the utility from theLAST rupee spent on ALL goods is equal
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Law of Equi-marginal
UtilityRs.25/-/unitUtility derived
from Rs.25/-spent on
Oranges
Caps Milk
1st 10 13 11
2nd 8 12 9
3rd 7 10 6
4th 5 8 5
5th 4 6 4
6th 3 4 2
Total Income to be spent =Rs.400/-
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Indifference CurvesLocus of all points which show the different
combination of two commodities a consumerachieves the same satisfaction or utility.
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Properties of Indifference
curvesLies in the positive quadrant.
IC s are downward sloping
Shape of curve is always convex to the origin.
IC s never intersect each other.
Higher IC means higher utility.
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Marginal Rate of
SubstitutionProportion of one good that the consumer will
be willing to give up for more of another.
Combination
A B MRS
C1 1 6 -
C2 3 3 1.5
C3 4 2 1
C4 7 1 0.3
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Types of IC s
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