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Economics For Managers

            

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Chapter 3 : Consumer Behavior

Choice And Utility Theory

Measurement of Utility
Assumptions of Utility Theory
Total Utility
Marginal Utility

Law Of Diminishing Marginal Utility

Application and Uses of Diminishing Marginal Utility

Equimarginal Utility

Derivation of the Demand Curve

Substitution And Income Effect

Substitution Effect
Income Effect

Indifference Curve Analysis

Marginal Rate of Substitution
Budget Constraint
Consumer Equilibrium

Consumer Surplus

Applications of Consumer Surplus

Chapter Summary

In economic sense, consumer behavior theory explains the relationship between the changes in price and consumer demand. In the chapter, we have discussed the choice and utility theory. Utility is the extent of satisfaction obtained from the consumption of products and services by consumers. It can be measured by two approaches – cardinal and ordinal utility approach.

The chapter also explains various assumptions of utility theory: consumers are rational, they always prefer more quantity, they are ready to make tradeoffs. The chapter also discusses the diminishing marginal rate of substitution. We have also learned the concept of total utility and marginal utility. The law of diminishing marginal utility and its applications has been discussed at length.

The effect of substitution and income effect on the consumer behavior was also studied. Finally, the chapter explains about consumer surplus and its applications. Consumer surplus can be defined as the difference between what consumers would like to pay for a product and what they have actually paid.

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