Consumer Behavior PDF

CONSUMER BEHAVIOR - Study of how individual customers, group or organizations select, buy, use and dispose ideas and services to satisfy their needs and wants According to ENGEL, BLACKWELL AND MANSARD: - Consumer behavior is the actions and decisions processes of people who purcha...

CONSUMER BEHAVIOR - Study of how individual customers, group or organizations select, buy, use and dispose ideas and services to satisfy their needs and wants According to ENGEL, BLACKWELL AND MANSARD: - Consumer behavior is the actions and decisions processes of people who purchase goods and services for personal consumption Importance of consumer behavior - Better marketing and communications - Improve customer retention - Increase consumer loyalty - Better plan inventory - Increase sales - Research competition Factors influencing Consumer behavior - Situational -- external, temporary influences that affect behavior and decision making such as environment, time or context - Personal -- involve characteristics such as age, gender, lifestyle and economic status that influence decision behavior - Social -- influences from family, friends, social groups, and social norms that shape behavior and decisions - Psychological -- intrinsic, motivation, such as perception, beliefs attitudes and learning that influence behavior Theory of Consumer behavior -- description of the consumers allocate incomes among different goods and services to maximize their well being Consumer behavior is best understood in three distinct step: 1. Consumer preferences 2. Budget constraints 3. Consumer choices Market basket - List of specific quantities of one or more goods Individual preferences - Completeness -- preferences are assumed to be completed consumers can compare and rank all possible basket - Transitivity -- regarded as consumer consistency (a&b, b&c, c&b, a&c) - More is better than less - consumer prefer more of any goods than less Indifference curve - Curve representing all combinations of market baskets that provide a consumer with the same level of satisfaction Indifference map -- graph containing a set of indifference curve showing the market baskets among which consumer is indifferent Marginal rate of substitution - Maximum amount of good that a consumer is willing to give up in order to have additional unit of another goods in the same satisfaction level Convexity -- when the MRS diminishes along indifference curve Perfect substitute -- two goods are identical in purpose can be replaced Perfect complements -- goods that cannot buy without the one another BADS -- goods that is preferred for which less is rather than more Cardinal utility - It explains that the satisfaction level after consuming a good or service can be scaled in terms of COUNTABLE NUMBERS - UTILITY is measured on the basis of utils - Theory was applied by PROF. MARSHALL - OTHER NAME: UTILITY ANALYIS Ordinal Utility - Explains the satisfaction after consuming a good or service cannot be scaled in numbers - Can be arrange in order of PREFERENCE - UTILITY is ranked based on SATISFACTION - Theory was applied by J.R HICKS AND R.G D. ALLEN - OTHER NAME: INDDIFFERENCE CURVE ANALYSIS Effect of CHANGE IN INCOME on the BUDGET LINE Budget constraints - Consumer face as a result of limited incomes Budget line - All combinations of goods for which the total amount of money spent is equal income Effects of CHANGE IN PRICE on the budget Price changes - (With income unchanged) causes the budget line to rotate about one intercept Marginal benefit - Benefit from the consumption of one additional unit of good Marginal cost - Cost of one additional unit of a good Marginal utility -- additional satisfaction obtained from consuming one additional unit of good Diminishing marginal utility -- as more of a good is consumed, the consumption of additional amounts will yield smaller additions to utility Equal marginal principle - principle that utility is maximized when the consumer has equalized the marginal utility per dollar of expenditure across all goods Consumer equilibrium -- entails decisions about how much the consumer will consume several goods and services Maximization total utility -- when consumer make choices about the number of goods and services to consume Marginal utility -- change in total utility as an individual consumes each additional unit of commodity Utility -- total satisfaction received from consuming goods and services SATURATION POINT -- the product has reached all the potential consumer and the demand of the product is now less than the supply Total utility - sum of the total utility derived from each unit of commodity - aggregate amount of satisfaction or fulfillment that a consumer receives through the consumption of a specific good or services MRS Utility in other words: happiness -- measures how happy the consumers are an increase utility means consumers are better off and decrease are worse. No. of bread Marginal utility Total utility -------------- ------------------ --------------- 1 20 20 2 16 36 = (20+16) 3 12 48 = (36+12) 4 8 56 = (48+8) 6 4 60 = (56+4) TOTAL: 60 PROFIT MAXIMIZATION RULE (if a firm chooses to maximize its profits) - Marginal cost is equal to Marginal revenue (MC=MR) MAXIMIZE TOTAL UTILITY (consumer) - Should spend it on the items which yields the greatest marginal utility per dollar of expenditure