Chapter - 2
Thoery of Demand and Supply
Unit -2 Theory of Consumer Behaviour
◼ Meaning Of wants
• All desires, tastes and motives of human beings are called wants in Economics.
• Wants may arise due to elementary and psychological causes.
• Since the resources are limited, we have to choose between the urgent wants and the not so urgent
wants.
◼ Features of ‘Wants’
All wants of human beings exhibit some characteristic features:-
1. Wants are unlimited in number. They are never completely satisfied.
2. Wants differ in intensity. Some are urgent, others are felt less intensely.
3. Each want is satiable.
4. Wants are competitive. They compete each other for satisfaction because resources are scarce to satisfy
all wants.
5. Wants are complementary. Some wants can be satisfied only by using more than one good or group of
goods.
6. Wants are alternative.
7. Wants are subjective and relative.
8. Wants vary with time, place, and person.
9. Some wants recur again whereas others do not occur again and again.
10. Wants may become habits and customs.
11. Wants are affected by income, taste, fashion, advertisements and social customs.
12. Wants arise from multiple causes such as natural instincts, social obligation and individual’s economic
and social status
◼ Classification of ‘Wants’
• In Economics, wants are classified into three categories, viz., necessaries, comforts and luxuries.
• Necessaries
• Necessaries are those which are essential for living. Necessaries are further sub-divided into:-
necessaries for life or existence, necessaries for efficiency and conventional necessaries.
1. Necessaries for life are things necessary to meet the minimum physiological needs for the
maintenance of life such as minimum amount of food, clothing and shelter.
2. Necessaries for Efficiency:- Man requires something more than the necessities of life to
maintain longevity, energy and efficiency of work, such as nourishing food, adequate clothing,
clean water, comfortable dwelling, education, recreation etc. These are necessaries for efficiency.
3. Conventional necessaries arise either due to pressure of habit or due to compelling social
customs and conventions. They are not necessary either for existence or for efficiency.
1 Theory of Demand & Supply
, • Comforts
• While necessaries make life possible comforts make life comfortable and satisfying. Comforts are
less urgent than necessaries. Tasty and wholesome food, good house, clothes that suit different
occasions, audio-visual and labour saving equipments etc. make life more comfortable.
• Luxuries
• Luxuries are those wants which are superfluous and expensive. They are not essential for living.
Items such as expensive clothing, exclusive motor cars, classy furniture, goods used for vanity etc
fall under this category.
Concept of Utility
• The concept of utility is used in neo classical Economics to explain the operation of the law of demand.
◼ Meaning
• Utility is the want satisfying power of a commodity.
• Point to be noted:-
Utility is the anticipated satisfaction by the consumer, and satisfaction is the actual satisfaction
derived. A commodity has utility for a consumer even when it is not consumed.
◼ Features of Utility
• It is a subjective entity and varies from person to person.
• A commodity has different utility for the same person at different places or at different points of time.
• Utility v/s Usefulness:-
It should be noted that utility is not the same thing as usefulness. From the economic standpoint, even
harmful things like liquor, may be said to have utility because people want them. Thus, in Economics,
the concept of utility is ethically neutral.
◼ Various Approaches to utility
• From time to time, different theories have been advanced to explain consumer behaviour and thus to
explain his demand for the product. Two important theories are
1. Marginal Utility Analysis propounded by Marshall, and
2. Indifference Curve Analysis propounded by Hicks and Allen
Cardinal Approach of Utility Analysis
This theory which is formulated by Alfred Marshall, a British economist, seeks to explain how a consumer
spends his income on different goods and services so as to attain maximum satisfaction.
◼ Concept of Total Utility and Marginal Utility
• Total Utility
• Total utility is the sum of marginal utilities derived from the consumption of different units i.e. TU=
MU1+MU2+……. +MUn
• Marginal Utility
• it is the utility derived from the marginal or one additional unit consumed
• Symbolically, MUn_= TUn – TUn-1
• MU can be positive, zero or negative
2 Theory of Demand & Supply
Thoery of Demand and Supply
Unit -2 Theory of Consumer Behaviour
◼ Meaning Of wants
• All desires, tastes and motives of human beings are called wants in Economics.
• Wants may arise due to elementary and psychological causes.
• Since the resources are limited, we have to choose between the urgent wants and the not so urgent
wants.
◼ Features of ‘Wants’
All wants of human beings exhibit some characteristic features:-
1. Wants are unlimited in number. They are never completely satisfied.
2. Wants differ in intensity. Some are urgent, others are felt less intensely.
3. Each want is satiable.
4. Wants are competitive. They compete each other for satisfaction because resources are scarce to satisfy
all wants.
5. Wants are complementary. Some wants can be satisfied only by using more than one good or group of
goods.
6. Wants are alternative.
7. Wants are subjective and relative.
8. Wants vary with time, place, and person.
9. Some wants recur again whereas others do not occur again and again.
10. Wants may become habits and customs.
11. Wants are affected by income, taste, fashion, advertisements and social customs.
12. Wants arise from multiple causes such as natural instincts, social obligation and individual’s economic
and social status
◼ Classification of ‘Wants’
• In Economics, wants are classified into three categories, viz., necessaries, comforts and luxuries.
• Necessaries
• Necessaries are those which are essential for living. Necessaries are further sub-divided into:-
necessaries for life or existence, necessaries for efficiency and conventional necessaries.
1. Necessaries for life are things necessary to meet the minimum physiological needs for the
maintenance of life such as minimum amount of food, clothing and shelter.
2. Necessaries for Efficiency:- Man requires something more than the necessities of life to
maintain longevity, energy and efficiency of work, such as nourishing food, adequate clothing,
clean water, comfortable dwelling, education, recreation etc. These are necessaries for efficiency.
3. Conventional necessaries arise either due to pressure of habit or due to compelling social
customs and conventions. They are not necessary either for existence or for efficiency.
1 Theory of Demand & Supply
, • Comforts
• While necessaries make life possible comforts make life comfortable and satisfying. Comforts are
less urgent than necessaries. Tasty and wholesome food, good house, clothes that suit different
occasions, audio-visual and labour saving equipments etc. make life more comfortable.
• Luxuries
• Luxuries are those wants which are superfluous and expensive. They are not essential for living.
Items such as expensive clothing, exclusive motor cars, classy furniture, goods used for vanity etc
fall under this category.
Concept of Utility
• The concept of utility is used in neo classical Economics to explain the operation of the law of demand.
◼ Meaning
• Utility is the want satisfying power of a commodity.
• Point to be noted:-
Utility is the anticipated satisfaction by the consumer, and satisfaction is the actual satisfaction
derived. A commodity has utility for a consumer even when it is not consumed.
◼ Features of Utility
• It is a subjective entity and varies from person to person.
• A commodity has different utility for the same person at different places or at different points of time.
• Utility v/s Usefulness:-
It should be noted that utility is not the same thing as usefulness. From the economic standpoint, even
harmful things like liquor, may be said to have utility because people want them. Thus, in Economics,
the concept of utility is ethically neutral.
◼ Various Approaches to utility
• From time to time, different theories have been advanced to explain consumer behaviour and thus to
explain his demand for the product. Two important theories are
1. Marginal Utility Analysis propounded by Marshall, and
2. Indifference Curve Analysis propounded by Hicks and Allen
Cardinal Approach of Utility Analysis
This theory which is formulated by Alfred Marshall, a British economist, seeks to explain how a consumer
spends his income on different goods and services so as to attain maximum satisfaction.
◼ Concept of Total Utility and Marginal Utility
• Total Utility
• Total utility is the sum of marginal utilities derived from the consumption of different units i.e. TU=
MU1+MU2+……. +MUn
• Marginal Utility
• it is the utility derived from the marginal or one additional unit consumed
• Symbolically, MUn_= TUn – TUn-1
• MU can be positive, zero or negative
2 Theory of Demand & Supply
