UNIT - II NOTES

1. CONSUMER BEHAVIOUR
To succeed in a dynamic marketing environment, marketers have an urgent need to learn
and anticipate whatever they can about consumers. The better they know and understand
consumers, the more advantageous it would prove in accomplishing their organisational
objectives. Marketers want to know what consumers think, what they want, how they work,
how they entertain themselves, how they play etc. They also need to comprehend personal
and group influences which have a significant impact on consumer decision-making process.
Definition of Consumer Behaviour
“Consumer behaviour refers to the actions and decision processes of people who
purchase goods and services for personal consumption.”
James F Engel, Roger D Blackwell and Paul W Miniard,
“Consumer Behaviour” (Dryden Press, 1990) Consumer behaviour refers to “the mental
and emotional processes and the physical activities of people who purchase and use goods and
services to satisfy particular needs and wants.”
Bearden et al. “Marketing Principles and Perspectives.”
“The behaviour that consumers display in searching for, purchasing, using, evaluating
and disposing of, if products and services that they expect will satisfy their needs.”
Nature of Consumer Behaviour
1. Process: Consumer behaviour is a systematic process relating to buying decisions of
the customers. The buying process consists of the following steps;
• Identification to buy the product.
• Information search relating to the product.
• Listing of alternative brands.
• Evaluating the alternative (cost-benefit analysis)
• Purchase decision.
• Post-purchase evaluation by the marketer.
2. Influenced by Various Factors: Consumer behaviour is influenced by a number of
factors. The factors that influence consumers include marketing, personal, psychological,
situation based, social, cultural etc.,
3. Different for all Customers: All consumers do not behave in the same manner.
Different consumers behave differently. The difference in consumer behaviour is due to
individual factors such as nature of the consumer’s life style, culture, etc.,
4. Different for Different Products: Consumer behaviour is different for different
products. There are some consumers who may buy more quantity of certain items and very
low or no quantity of some other items
Importance/Need of Study of Consumer Behaviour
• The Consumer is King.
• Only the Customer Can Fire Us All
• People are different
• Consumer behavior educates and protects consumers
• To make better strategies for increasing profits
• To take into consideration customer’s health, hygiene & fitness
• To know the buying decisions and how consumer make consumption
• Consistent change in Consumer’s tastes or preferences
• Consumer behavior study is necessary to make pricing policies
• To avoid future market failures
Characteristics of Consumer Behaviour
• It is a process where consumer decide what to buy, when to buy, how to buy, where to
buy & how much to buy.
• It comprises of both mental and physical activities of consumer.
• Consumer behaviour is very complex and dynamic which keeps on changing
constantly.
• Individual buying behaviour is affected by various internal factors like his needs,
wants, attitudes & motives and also by external factors like social groups, culture,
status, environmental factors etc.
• Consumer behaviour starts before buying and even after buying.
Types of Consumer Behaviour
• Customer: means who purchases the product from the marketer or from the retailer
or from the wholesaler. Here we don’t bother about who uses the product.
• Consumer: means who uses the product of course purchased by the customer. Here
we consider finally who is going to use the product we call them as consumer.
• Buyer: The person who purchase goods either for resale or for use in production or
for use of somebody else.
• The Ultimate Consumer: Those individuals who purchase for the purpose of
individual or household consumption.
• Institutional buyer: These are either govt. institutions or private organizations
Factors Affecting Consumer Behavior

CULTURAL FACTORS
Culture - It is a mix of customs, beliefs and values of consumers of a particular
country.
Social Class - These are permanent groups in the society whose members have
common likings
SUB CULTURE
Sub Culture - Subcultures are part of culture consisting of geographic regions, religions,
nationalities and racial groups. The values of these groups are different from each other.
• Religion
 • Geographical location
• Gender (male/female)
SOCIAL CLASS
Relatively permanent and ordered divisions in a society whose members share similar
values, interests and behavior.
SOCIAL FACTORS
Reference Groups - “Reference groups are groups that people refer to when evaluating
their own qualities, attitudes, values and behaviors.”
Family Members
Relatives
Role in the Society
Status in the society
PERSONAL FACTORS
Occupation
Age
Economic Condition
Lifestyle
Personality
PSYCHOLOGICAL FACTORS
Perception
Learning
Beliefs and Attitude
Motivation
Who influence a consumer?

Obtaining

The activity that leading up to and including purchase or receipt of a product.

• How they get information?
• How they decide what to buy?
 • Where you buy?
• How you pay for it?
• How you take it to their home?
Meaning of Consumption
People don’t buy products for what they do but for what they mean”
• Different types of relationship:-
• Self concept – user’s self image.
• Interdependence – part of users daily routine.
• Love – emotional bonds with the user.
Disposing
• How they get rid of remaining product?
• How much they throw away after use?
• How they recycle the product?
Application of CB with Marketing Prospect
From the marketing point of view, understanding consumer behaviour is crucial to
successful
delivery of firms’ offering in the market place.
Market-Opportunity Analysis: this involves examining trends and conditions in the
marketplace to identify consumers’ needs and wants that are not being fully satisfied.

Target Market Selection: this has to do with identifying distinct groupings of

consumers who have unique wants and needs and the selection of segment that
matches the firm’s strength and offer better opportunities.
Marketing- Mix Determination: this involves developing and implementing a
strategy for delivering an effective combination of want-satisfying features to
consumers within target market.
Marketing strategy: understanding of consumer behaviour is needed in strategic
marketing activities. This is because marketing strategies and tactics are based on
explicit or implicit beliefs about consumer behaviour.
Dark side of Consumer Behavior
• Addictive consumption – Gambling, Alcohol, Drugs.
• Consumed consumption – Consumers who are exploited. Ex) Adopting a baby,
organ donors, blood donors.
• Illegal activities – Theft.
• Anti-consumption – People who create aversion towards a product ex) Burned
lungs image, V-care shampoo ads

2. DEMAND
What is demand?
• Desire
• Want
• Demand
– desire to get a commodity
– ability to buy
– willingness to buy
– demand is always at a point of time
– demand is always at a price
Definition
 Demand refers to the quantities of a commodity that the consumers are able and willing
to buy at each possible price during a given period of time, other things being equal.” Ferguson
The Law of Demand
• Law of demand states that the amount demanded of a commodity and its price are
inversely related, other things remaining constant.
– Substitution effect of a price change and
– Income effect of a price change
• The Law of Demand states that as Demand goes up Price goes down.
• There is an Inversely proportional relationship between Price and Demand
Schedule and Diagram of Law of Demand

Factor Influencing Demand

1. Price
2. Income
3. Utility
4. Habits
5. Fashion
6. Weather Condition
7. Advertisement
8. Taxation
9. Speculation
Types of Demand
 Demand can be of three types:
 Price demand
 Income demand
 Cross demand.
Price demand:
 price demand refers to the quantity of a product or service demand at a given price.
 Income demand:
 Income demand refers to the quantity of a particular product or service demanded at
a given level of income of the consumer or the household.
Cross demand:
 cross demand refers to the quantity demanded for a particular product or service given
the price of a related good.
 The related good may be complementary or a substitute.

3. UTILITY ANALYSIS
The term utility in economics is used to denote that quality in a commodity or service by
virtue of which our wants are satisfied. In other words, want – satisfying power of a good is
called utility.

Cardinal Utility Vs Ordinal Utility

• Cardinal
Assigning numerical values to the amount of satisfaction
• Ordinal
Not assigning numerical values to the amount of satisfaction but indicating the order
of preferences, that is, what is preferred to what

Characteristics
• Subjective
• Relative
• Not Essentially Useful
• Independent of Morality
• Types of Utility
Initial Utility
It is obtained from the consumption of the first unit of a commodity
• Total Utility
Tux = f (Qx)
• Marginal Utility
MUnth = Tn – Tn-1 or MU = change TU/ change Q

 Relation Between Total Utility and Marginal Utility:

Quantity Total Utility Marginal Utility Description

0 0 -
Initial Utility
1 8 8–0=8
2 14 14 – 8 = 6
3 18 18 – 14 = 4 Positive Utility
4 20 20 – 18 = 2
5 20 20 – 20 = 0 Zero Utility
6 18 18 – 20 = -2 Negative Utility
Graphs of Total Utility & Marginal Utility

TU

X1 X2 X

MU

11/26/2024 X1 X2 X
X1 is where marginal utility reaches its maximum.

This is where we encounter diminishing marginal utility.

The slope of TU has reached its maximum; TU has an inflection point here.
X2 is where total utility reaches its maximum.

MU is zero.

This is the saturation point or satiation point.

After that point, TU falls and MU is negative.

No. of Ice Cream Cups Marginal Utility

First 4
Second 3
Third 2
Fourth 1
Fifth 0
Sixth -1

4
3
2
1
0

1 2 3 4 5 6 X
-1 11/26/2024 B

Table Shows:

The table shows that first cup of ice cream yields 4utils of marginal utility.
The second cup of ice cream will yield less marginal utility than the first one i.e. 3utils.
Third cup will yield still less MU, say 2utils.
Fourth cup will yield just 1utils of MU. At this stage want may be fully satisfied.
Thus fifth cup will yield zero MU. If you are forced to take sixth cup of ice cream it may
upset system and yields negative utility say, -1 util.
 In the Figure:
OX axis – Ice Cream(Quantity)
OY axis – Marginal Utility(MU)
AB is Marginal Utility Curve (MUC)
It slopes downward from left to right (negative slope) indicating first cup of ice cream 4
utils, second 3 utils, third 2 utils and fourth 1util of marginal utility. Fifth cup of ice – cream
yields zero marginal utility.
AB curve touches OX – axis at point C that represents fifth cup of ice cream.
sixth cup of ice cream yields negative marginal utility and so AB curve goes below OX –
axis.
Assumptions
• Utility can be measured in the Cardinal number system.
• Marginal Utility of money remains constant.
• Marginal Utility of every commodity is independent.
• Every unit of the commodity being used is of same quality and size.
• There is a continuous consumption of commodity
• Suitable quantity of a commodity is consumed.
• There is no change in the income of consumer.
• There is no change in the price of commodity and its substitutes.
• There is no change in the tastes, character, fashion, and habits of consumer.
Criticism of utility analysis
• Utility is subjective
• Cardinal measurement of Utility is not possible
• Every commodity is not an independent commodity
• Marginal utility cannot be estimated in all conditions
• Marginal utility of money does not remain constant
• Too many assumptions
• consumer is regarded as computer
• It does not explain giffen’s paradox

4. ELASTICITY OF DEMAND

 Elasticity of demand explains the relationship between a change in price and consequent
change in amount demanded. “Marshall” introduced the concept of elasticity of demand.
Elasticity of demand shows the extent of change in quantity demanded to a change in
price.
 In the words of “Marshall”, “The elasticity of demand in a market is great or small
according as the amount demanded increases much or little for a given fall in the price
and diminishes much or little for a given rise in Price”
Elastic Demand
 A small change in price may lead to a great change in quantity demanded. In this case,
demand is elastic.
In-Elastic Demand
 If a big change in price is followed by a small change in demanded then the demand in
“inelastic”.
Types of Elasticity of Demand
There are three types of elasticity of demand:
 1.Price elasticity of demand
2.Income elasticity of demand
3.Cross elasticity of demand
Price elasticity of Demand
Marshall was the first economist to define price elasticity of demand. Price elasticity of
demand measures changes in quantity demand to a change in Price. It is the ratio of
percentage change in quantity demanded to a percentage change in price.

Proportionate change in the quantity demand of commodity

 Price elasticity = --------------------------------------------------------------------
Proportionate change in the price of commodity
Five Cases of Price Elasticity of Demand
A. Perfectly elastic demand:
B. Perfectly Inelastic Demand
C. Relatively elastic demand:
D. Relatively in-elastic demand.
E. Unit elasticity of demand:
A. Perfectly Elastic Demand
 When small change in price leads to an infinitely large change is quantity demand, it is
called perfectly or infinitely elastic demand. In this case E=∞
 The demand curve DD1 is horizontal straight line. It shows the at “OP” price any
amount is demand and if price increases, the consumer will not purchase the commodity.

B. Perfectly Inelastic Demand

 In this case, even a large change in price fails to bring about a change in quantity
demanded.

 When price increases from ‘OP’ to ‘OP’, the quantity demanded remains the same. In
other words the response of demand to a change in Price is nil. In this case ‘E’=0.
C. Relatively elastic demand

 Demand changes more than proportionately to a change in price. i.e. a small change in
price loads to a very big change in the quantity demanded.

 In this caseE > 1. This demand curve will be flatter.

 When price falls from ‘OP’ to ‘OP’, amount demanded in crease from “OQ’ to “OQ1’
which is larger than the change in price.

D. Relatively in-elastic demand.

 Quantity demanded changes less than proportional to a change in price. A large change
in price leads to small change in amount demanded.

 Here E < 1. Demanded carve will be steeper.

 When price falls from “OP’ to ‘OP1 amount demanded increases from OQ to OQ1,
which is smaller than the change in price.
 E. Unit Elasticity of demand

 The change in demand is exactly equal to the change in price. When both are equal
E=1 and elasticity if said to be unitary.

 When price falls from ‘OP’ to ‘OP1’ quantity demanded increases from ‘OP’ to ‘OP1’,
quantity demanded increases from ‘OQ’ to ‘OQ1’. Thus a change in price has resulted
in an equal change in quantity demanded so price elasticity of demand is equal to
unity.

1. INCOME ELASTICITY OF DEMAND

 Income elasticity of demand shows the change in quantity demanded as a result of a

change in income.

 Income elasticity of demand may be slated in the form of a formula.

Proportionate change in the quantity demand of commodity

Income Elasticity = ----------------------------------------------------------------------

Proportionate change in the income of the people

INCOME ELASTICITY OF DEMAND FIVE TYPES
A. Zero income elasticity
B. Negative Income elasticity
C. Unit income elasticity
D. Income elasticity greater than unity
E. Income elasticity leas than unity
A. Zero Income Elasticity
Quantity demanded remains the same, even though money income increases.
Symbolically
it can be expressed as Ey=0. It can be depicted in the following way:
As income increases from OY to OY1, quantity demanded never changes.

B. Negative Income Elasticity

When income increases, quantity demanded falls. In this case, income elasticity of demand
is negative. i.e., Ey < 0.
 When income increases from OY to OY1, demand falls from OQ to OQ1.

C. Unit Income Elasticity

When an increase in income brings about a proportionate increase in quantity demanded,
and then income elasticity of demand is equal to one. Ey = 1
 When income increases from OY to OY1, Quantity demanded also increases from OQ
to OQ1.
D. Income Elasticity Greater Than Unity
In this case, an increase in come brings about a more than proportionate increase in quantity
demanded. Symbolically it can be written as Ey > 1.
 It shows high-income elasticity of demand. When income increases from OY to OY1,
Quantity demanded increases from OQ to OQ1.

E. Income Elasticity Less Than Unity

When income increases quantity demanded also increases but less than proportionately.
In this case E < 1.
An increase in income from OY to OY, brings what an increase in quantity demanded
from OQ to OQ1, But the increase in quantity demanded is smaller than the increase in
income. Hence, income elasticity of demand is less than one.
5. CROSS ELASTICITY OF DEMAND
 A change in the price of one commodity leads to a change in the quantity demanded of
another commodity. This is called a cross elasticity of demand.
 The formula for cross elasticity of demand is:

Proportionate change in the quantity demand of commodity “X”

 Cross elasticity = -----------------------------------------------------------------------------
Proportionate change in the price of commodity “Y”
In Case of Substitutes
Cross elasticity of demand is positive. Eg: Coffee and Tea
 When the price of coffee increases, Quantity demanded of tea increases. Both are
substitutes.

Incase of Compliments
Cross elasticity is negative. If increase in the price of one commodity leads to a decrease in
the quantity demanded of another and vice versa.
When price of car goes up from OP to OP!, the quantity demanded of petrol decreases from
OQ to OQ!. The cross-demanded curve has negative slope.
 In Case of Unrelated Commodities

 cross elasticity of demanded is zero. A change in the price of one commodity will not
affect the quantity demanded of another.

 Quantity demanded of commodity “b” remains unchanged due to a change in the price
of ‘A’, as both are unrelated goods.

5. FACTORS OF PRODUCTION
Objectives
• Define “factors of production”
• Describe four factors of production
• Identify four factors of production
• State the payments to the factors of production
• Classify factors of production
What are factors of production?
Factors of production are the resources used to produce goods and services
These resources are also called inputs.
There are FOUR factors of production.
• Land
• Labour
• Capital
• Enterprise/Entrepreneurship
LAND
What is land?
All the naturally occurring resources (gifts of nature).
Land is also called natural resources.
 It includes resources found:
❖ in the air (oxygen)
❖ in the land (gold)
❖ on the land (forests)
❖ in the water (pearls from clams)
❖ The payment for land is rent.
 Characteristics of land
• Land is fixed in supply
• It has no cost of production
• It is geographically immobile
Different Types of Land
• Agriculture land
• Recreation
• Extraction
• Agriculture
• Horticulture
• Residential
• Uninhabitable
• Commercial
LABOUR
What is labour?
• All human effort – whether mental or physical that contributes to production
• Labour is also called human resources
• Examples – nurses, soldiers, teachers
• The payment for labour is called wages
Types of labour
Type of labour Explanation Examples

Unskilled Little or no formal training Street cleaners

Semi-skilled Requires some formal training Assembly line worker
Skilled Requires high levels of training Engineers, mason
Requires high levels of education and
Professional Doctors, teachers
professional qualifications

CAPITAL
What is capital?
• Capital refers to all man-made resources used in the production process
• Examples include machinery
• And
• Equipment
The payment for the use of capital is called interest.
Types of capital

Type of capital Explanation Example

Capital that does not change shape during
Fixed Tractors, machinery
production
Working Capital that is used up during production Cash, materials

Venture Capital invested at the start up of a business Cash

 ENTERPRISE
What is enterprise?
• This is the ability to combine or organise the other factors of production and to take
risks
• It is also called entrepreneurship
• The payment for enterprise is profit

6. COST CURVES CONCEPT

MEANING OF COST
Cost may be defined as the monetary value of all sacrifices made to achieve an objective
i.e. to produce goods and services. Cost are very important in business decision making. Cost
of production provides the floor to pricing. It helps manager to take correct decision, such as
what price to quote whether to place particular order for inputs or not whether to abandon or
add a product to the existing product line and so on.

Ordinarily, cost refer to the money expenses incurred by a firm in the production
process. Cost also included imputed value of the entrepreneur’s own resources and services, as
well as salary of the owner-manager.

DETERMEAINTS OF COST
Factors determining the cost are:

(a) Size of plant: There is an inverse relationship between size of plant and cost. As size of plant
increases, cost falls and vice versa.

(b) Level of Output: There is a direct relationship between output level and cost. More the level
of output, more is the cost ( i. e., total cost) and vice Versa.

(c) Price of Inputs: There is a direct relationship between price of inputs and cost. As the price
of inputs rises, cost rises and vice versa.

(d) State of technology: More modern and upgraded the technology implies lesser cost and vice
versa.

(e) Management and administrative efficiency: Efficiency and cost are inversely related. More
the efficiency in management and administration better will be the product and less will be the
cost. Cost will increase in case of inefficiencies in management and administration.

Fixed Cost
Fixed cost are the amount spent by the firm on fixed inputs in the short run. Fixed cost
are thus, those costs which remain constant, irrespective of the level of output. These costs
remain unchanged even if the output of the firm is nil. Fixed costs therefore, are known as
Supplementary costs or Overhead costs.
Variable Costs
Variable costs are those cost that change directly as the volume of output changes. As
the production increases variable cost also increases, and as the product decreases variable costs
also decreases, and when the production stops variable cost is zero.

Total cost
Total cost is the total expenditure incurred in the production of goods and services.
TC= TFC+TVC

Average cost
Average cost is not actual cost, It is obtained by dividing the total cost by the total output.
AC= Total Cost/Units Produced.
Marginal Cost (MC):
The cost incurred on producing one additional unit of commodity is known as marginal cost.
Thus it shown a change in total cost when one more or less unit is produced.
MC= TCn – TC(n-1 )
Marginal Cost is the increase in TC as a result of an increase in output by one unit. In other
words it is the cost of producing an additional unit of output.
7. MARKET STRUCTURE
• Market structure is the interconnected characteristics of a market, such as the number
and relative strength of buyers and sellers, degree of freedom in determining the price,
level and forms of competition, extent of product differentiation and ease of entry into
and exit from the market

The types of market structures include-

• Perfect Competition,
• Monopoly,
• Monopolistic Competition,
• Oligopoly,
• Duopoly.
• Market structure is best defined as the organizational and other characteristics of a
market.
PERFECT COMPETITION
1. All firms sell an identical product.
2. All firms are price takers.
3. All firms have a relatively small market share.
4. Buyers know the nature of the product being sold and the prices charged by each firm.
5. The industry is characterized by freedom of entry and exit.
It is also referred as “PURE COMPETITION”.
• Potatoes are sold in markets where all vendors sell homogenous products at
homogeneous prices.
• Example- Potato is sold at markets etc. where all vendors sell homogenous products,
i.e. potato.
MONOPOLY
• A Monopoly is a market structure in which there is only one producer/seller for a
product. In other words, the single business is the industry.
• Entry into such a market is restricted due to high costs or other impediments, which may
be economic, social or political.
• Gillette is a razor blade that enjoys monopoly in market because every consumer
purchases this brand and this is a trusted brand.
• Gillette Mach 3 turbo sensitive and Gillette fusion are latest version.
MONOPOLISTIC COMPETITION
• Monopolistic competition is a type of imperfect competition such that one or two
producers sell products that are differentiated from one another as goods but not perfect
substitutes (such as from branding, quality, or location).
• In monopolistic competition, a firm takes the prices charged by its rivals as given and
ignores the impact of its own prices on the prices of other firms.
• Consumers may like some special thing in the particular brand.
• Shoes are produced by many producers but consumers may feel that a particular
company is branded or the quality produced by one company is better than the other.
 • Different company’s shoes can be easily differentiated and despite differentiation each
product remains close substitute for the rival product.
• There is no pure competition
• Shoes come under monopolistic competition because there are many producers and
consumers choose according to the brand, quality, location, trademark, design, colour,
packaging, etc. and not on the basis of price only.
DUOPOLY
• A situation in which two companies own all or nearly all of the market for a given
product or service.
• It is a specific type of oligopoly where only two producers exist in one market. In reality,
this definition is generally used where only two firms have dominant control over a
market.
• In the field of industrial organization, it is the most commonly studied form of oligopoly
due to its simplicity.
• In the market Pepsi and Coca-Cola rule in soft drinks. So they come under Duopoly.
• Other soft drinks are also there bur these two companies cover large share in soft drinks
market.
OLIGOPOLY
• It is a situation in which a particular market is controlled by a small group of firms.
• An oligopoly is a market form in which a market or industry is dominated by a small
number of sellers (oligopolists). Because there are few sellers, each oligopolist is likely
to be aware of the actions of the others.
• The decisions of one firm influence, and are influenced by, the decisions of other firms.
• These companies produce instant noodles.
• Earlier Maggi used to enjoy monopoly in this sector but with the entry of the other three
companies Maggi now comes in oligopoly.
• These four companies majorly rule the market in instant noodles so they come in
oligopoly.

Reference Books
• Dr. S. Sankaran, Micro Economics, Margham Publications, Chennai, 2000.
• M.L. Jhingan, Micro Economic Theory, Vrinda Publications Ltd., New Delhi, 2002.
• HL AHUJA (2018) Advanced Economic Theory S.Chand & Co
• Misra and Puri, Advanced Micro Economics Himalaya Publishing House, Mumbai,
1996.