Microeconomics lecture.2

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Lecture outlines:
 Themes of Microeconomics
 Theories and Models
 Positive versus Normative Economics
 Introduction of consumer behavior
 Definitions of Consumer Behavior
 Importance of Consumer Behavior
 Nature of Consumer Behavior
 Scope of Consumer Behavior

Themes of Microeconomics
 Š According to Mick Jagger & the Rolling Stones, “You can’t always get what
you want”.
 Why Not? Š
 Limited Resources Š
 Unlimited Wants Š
 Allocation of Scarce Resources and Trade-offs Š
 In a planned economy Š
 In a market economy Š
 Microeconomics and Optimal Trade-offs
 1. Consumer Theory
 2. Workers
 3. Theory of the Firm Š
 Microeconomics and Prices –
 The role of prices in a market economy
 How prices are determined3

Theories and Models Š
 Microeconomic Analysis:
 Theories are used to explain observed
phenomena in terms of a set of basic rules
and assumptions.
 For example
 – The Theory of the Firm
 – The Theory of Consumer Behavior
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Theories and Models Š
 Models: A mathematical representation of a
theory used to make a prediction. –
 Validating a Theory
 The validity of a theory is determined by the
quality of its prediction, given the
assumptions.
 Evolving the Theory
 Testing and refining theories is central to the
development of the science of economics.5

Positive versus Normative
Economics Š
 Positive Economics
 Positive economics deals with the
observations or predictions of the facts of
economic life.
 For example: What will be the impact of an
increase in wages on the price of a product?
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Positive versus Normative
Economics Š
 Normative Economics:
 Normative Economics is the value
judgments about how economics should
operate, based on certain moral principles or
preferences?”
 For example: What wage rate should be paid
to the auto workers to make them an active
member of the society?
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Chapter#2
THEORY OF CONSUMER
BEHAVIOR
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CONSUMER:
 Any individual who purchases goods and services from the
market for his/her end-use is called a consumer. In simpler
words a consumer is one who consumes goods and services
available in the market.
 In other words, consumer is an ultimate user of a product or
service.
 According to International Dictionary of Management,
“consumers are purchasers of goods and services for
immediate use and consumption”
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INTRO OF CONSUMER
BEHAVIOR:
 Human being differs from one to another. It is not
easy to predict the human behavior.
 Human being differs in their taste, needs, wants and
preferences. But one constant thing is that we all are
consumers.
 Consumer behavior explains the reasons and logic
that underlie purchasing decisions and consumption
patterns; it explains the processes through which
buyers make decisions.
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DEFINITIONS OF CONSUMER
BEHAVIOR:
 1. “The behaviour that consumers display in searching for,
purchasing, using, evaluating and disposing of products and
services that they expect will satisfy their needs.”- Schiffman
and Kanuk
 2. “…..the decision process and physical activity engaged in
when evaluating, acquiring, using or disposing of goods and
services." - Loudon and Bitta
 3. “The study of consumers as they exchange something of
value for a product or service that satisfies their needs”- Wells
and Prensky
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DEFINITIONS OF CONSUMER
BEHAVIOR:
 4. “Those actions directly involved in obtaining,
consuming and disposing of products and services
including the decision processes that precede and
follow these actions”. -Engel, Blackwell, Miniard
 5. “The dynamic interaction of effect and cognition,
behavior and the environment by which human
beings conduct the exchange aspects of their lives” -
American Marketing Association
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 By analyzing the above definition, it reveals that the study includes within its
purview, the interplay between cognition, affect and behavior that goes on
within a consumer during the consumption process: selecting, using and
disposing off goods and services.
 i. Cognition: This includes within its boundary the “knowledge, information
processing and thinking” part; It includes the mental processes involved in
processing of information, thinking and interpretation of stimuli (people, objects,
things, places and events). In our case, stimuli would be product or service
offering; it could be a brand or even anything to do with the 4Ps.
 ii. Affect: This is the “feelings” part. It includes the favorable or unfavorable
feelings and corresponding emotions towards stimuli (towards a product or
service offering or a brand). These vary in direction, intensity and persistence.
 iii. Behavior: This is the “visible” part. In our case, this could be the purchase
activity: to buy or not to buy (again specific to a product or service offering, a
brand or even related to any of the 4 Ps).
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Importance of Consumer
Behavior:
 . The knowledge of Consumer Behavior helps the marketer
understand and predict the consumption patterns and
consumption behaviors of people.
 It helps them gain insights as to why a consumer behaves
differently to another consumer; as well as, why a consumer
behaves differently in different times and buying situations.
 The study helps them understand the internal (individual
determinants) and external (environmental factors) forces that
impel people to act out different consumption patterns and
behavior
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Importance of Consumer
Behavior:
 The study helps the marketer in:
 a) Analyzing the environment: identifying
opportunities and fighting threats.
 b) Segmenting, targeting and positioning.
 c) Designing the marketing-mix.
 d) Designing the marketing strategy.
 e) Governmental and Non-profit Organization
and Social Marketing.
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Nature of Consumer Behavior:
 1. Process: -Consumer behavior is a systematic process relating to
buying decisions of the customers. The buying process consists of the
following steps;
 1) Need identification to buy the product
 2) Information search relating to the product.
 3) Listing of alternative brands.
 4) Evaluating the alternative (cost-benefit analysis)
 5) Purchase decision.
 6) Post-purchase evaluation by the marketer.
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Continue…
 2. Influenced by various factors: -Consumer behavior is influenced
by a number of factors. The factors that influenced consumer are as
follow; marketing, personal, psychological, situational, social, cultural
etc.
 3. Different for different customers: -All consumers do not behave in
the same manner. Different consumers behave differently. The
difference in consumer behavior is due to individual factors such as
nature of the consumer’s life style, culture, etc.
 4. Different for different products: -Consumer behavior is different
for different products. There are some consumers who may buy more
quantity of certain items and very low/no quantity of some other items.
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Continue…
 5. Varies across regions: -The consumer behavior vary across
states, regions and countries. For instance, the behaviour of urban
consumers is different from that of rural consumers. Normally, rural
consumers are conservative (traditional) in their buying behaviour.
 6. Vital for marketers: -Marketers need to have a good knowledge of
consumer behaviour. They need to study the various factors that
influence consumer behaviour of their target customers. The
knowledge of consumer behaviour enables marketers to take
appropriate marketing decisions.
 7. Reflects Status: -Consumers buying behaviour is not only
influenced by status of a consumer, but it also reflects it. Those
consumers who own luxury cars, watches and other items are
considered by others as persons of higher status.
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Continue…
 8. Result in spread-effect: -Consumer behaviour has a spread effect. The
buying behaviour of one person may influence the buying behaviour of another
person. For instance, a customer may always prefer to buy premium brands of
clothing, watches and other items etc. this may influence some of his friends,
neighbours, colleagues. This is one of the reasons why marketers use
celebrities like Sharukh khan, Sachin Tendulkar to endorse their brands.
 9. Improves Standard of Living: -Consumer buying behaviour may lead to
higher standard of living. The more a person buys the goods and services, the
higher is the standard of living.
 10. Undergoes a change: - The consumer’s behaviour undergoes a change
over a period of time depending upon changes in age, education and income
level. Etc, for instance,, kids may prefer colourful dresses, but as they grow up
as teenagers and young adults, they may prefer trendy clothes.
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Scope of Consumer Behaviour:
 The study of consumer behaviour deals with understanding
consumption patterns and behaviour. It includes within its ambit the
answers to the following:
  ‘What’ the consumers buy: goods and services
  ‘Why’ they buy it: need and want
  ‘When’ do they buy it: time: day, week, month, year, occasions etc.
 ‘Where’ they buy it: place
  ‘How often they buy’ it: time interval.
 ‘How often they use’ it: frequency of use
 The scope of consumer behaviour includes not only the actual buyer
but also the various roles played by him/ different individuals.
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Theory of Consumer Behavior:
 Our analysis of demand permits us to determine the underlying factors
affecting the level of consumer demand of a given commodity. An
increase in the price of a commodity, we expect consumers to react by
decreasing the quantity they want to buy. Our discussion of elasticity of
demand further develop our understanding of demand by showing to
us the extent of how consumers react to adjustment in price.
 The theory of consumer behavior describes how consumers buy
different goods and services. Furthermore, consumer behavior also
explains how a consumer allocates its income in relation to the
purchase of different commodities and how price affects his or her
decision.
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Continue…
 There are two theories that seek to explain
consumer behavior.
 These are:
1. The utility theory and
2. The indifference preference theory.
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1.The Utility Theory of Demand
 The utility theory explains consumer behavior in relation to the
satisfaction that a consumer gets the moment he consumes a
good. This theory was developed and introduced in 1870 by a
British Economist, William Stanley Jevons.
 When we speak of utility in economics, we refer to the
satisfaction or benefit that a consumer derives of his
consumption.
 The utility theory of demand assumes that satisfaction can be
measured. The unit of measure of utility is called utils.
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Law of Diminishing Marginal Utility
 The fundamental assumption of utility theory of
demand is that the satisfaction that a person derives
in consuming a particular product diminishes or
declines as more and more of a good is consumed.
 In other words, as successive quantity of goods is
consumed, the utility we derive diminishes. This is
called the law of diminishing marginal utility.
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2. Indifference Preference Theory
 Another theory explaining consumer behavior is the indifference preference
theory.
 Economist Vilfredo Pareto developed this modern approach to consumer
behavior. Under this, that analysis of consumer behavior is described in terms
of consumer preferences of various combinations of goods and services
depending on the nature, rather than from the measurability of satisfaction in
our previous discussion of the utility theory. Under the latter theory, consumer's
taste and preferences were presented by the way of total and marginal utility.
 Indifference Curve
 An indifference curve is a locus of points each of which represents a
combination of goods and services that will give equal level of satisfaction to a
consumer. To illustrate this, we consider an individual who prefer a combination
of 2 goods, say, food and clothing.
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Microeconomics lecture.2

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Microeconomics lecture.2