Consumer Behaviour Assignment Help
Incentive is a very commonly used term in day today life. It refers to something that motivates a decision maker in favour of one particular choice. Hence, it can be said to be a reward so that the decision maker works towards reaching the desired or intended outcome.
Types of Incentives
Incentives can be broadly categorized as:
- Positive Incentives: As the name suggests, positive incentives are those that reward the decision maker for making a particular choice. These are positive reinforcements and make the person feel happy. An example could be increment in salary or bonus for performing well in the job.
- Negative Incentives: As the name suggests, negative incentives or disincentives are those that reward the decision maker for not making a particular choice. These are negative reinforcements or penalties and make the person feel unhappy. An example could be the high tax on tobacco and alcohol products that make the product expensive and it is a disincentive for people to buy.
Hence, incentives are used to influence decision maker’s behaviour and achieve desired result. They are one of the foundations of economics as they motivate a person to achieve certain result and motivate the different organizations to compete.
Utility refers to the satisfaction that is derived by an individual when he or she consumes a good or a service.
Hence, the total utility (or satisfaction) derived by consuming a good or service is referred to as total utility. When depicted graphically, total utility is an inverted U-shaped curve.
According to the Cardinal Utility theory that was proposed by Alfred Marshall, the utility derived by a consumer can be measured and expressed numerically. Hence, according to this theory, utility can be measured mathematically and the unit of measurement is known as ‘Utils’. This theory is the basis of Marginal Utility concept.
However, this theory seems less realistic as it is very difficult to measure it numerically or in quantitative terms.
According to the Ordinal Utility theory that was proposed by J.R. Hicks and R.G.D. Allen, the utility derived by a consumer can be compared or ranked but cannot be measured and numerically. Hence, according to this theory, it is a psychological phenomenon and a consumer cannot express utility derived in absolute terms. However, the consumer can rank it or compare it with another good or service (whether the utility derived is more, less or almost same as compared to the other good or service). This theory is the basis of Indifference Curve concept.
This theory seems more realistic as it seems relatively easier to measure utility derived in qualitative terms or through ranking method.
Marginal utility refers to the additional utility (or satisfaction) derived by consuming one additional unit of the good or service, while holding consumption of all other goods and services constant. When depicted graphically, it is a downward sloping curve that can become negative also. Marginal utility curve is the slope of Total utility curve.
Theory of Diminishing Marginal Utility
The theory of Diminishing Marginal utility explains downward slope of the marginal utility curve. According to Marshall, as an individual consumes additional units of the same commodity, utility derived from each additional unit consumed declines continuously. Hence, for example, if a hungry person has consumed an orange, he will have some level of satisfaction. Let’s say, he consumes another orange, then his satisfaction from second unit consumed will be lesser than satisfaction derived from the first unit. Now, if that person consumes a third orange, satisfaction derived from third unit will be lesser than that derived from second unit and so on. This is because the person was hungry in the beginning and the orange satiated his hunger. However, as he kept on consuming more oranges, the intensity of hunger had reduced and correspondingly, level of satisfaction also reduced. It should be noted that all through consumption of oranges, the total utility derived is increasing (that is, total satisfaction derived) but the marginal utility is declining (that is, additional satisfaction from the additional unit). However, if the individual continues to consume oranges, a point will come where it will not be possible to eat any more oranges or if he does, he may face discomfort. At this point, marginal utility becomes negative and total utility starts to decline.
There are some assumptions related to this theory, such as:
- The units that are being consumed should be identical or homogeneous in all respects.
- The consumption of additional units should be continuous.
- The taste and preferences of the individual are constant during consumption period.
- The price of various commodities (subject commodity as well as substitutes) should remain constant.
The level of utility drawn by a consumer with respect to a particular commodity depends on that individual’s preferences:
- A particular bundle of goods (say, A) may be preferred to another bundle of goods (say, B). This implies A > B for that individual.
- A particular bundle of goods (say, A) may be equally preferred to another bundle of goods (say, B). This implies A = B for that individual.
Additionally, there is transitivity in choice of various bundles of goods. This implies that if A is preferred to B and B is preferred to C, then automatically, A is preferred to C. Further, a consumer will always prefer more of goods to less of goods.
These preferences as described above can be depicted graphically through curves known as Indifference Curves. An indifference curve is a collection of all commodity bundles which provide the consumer with the same level of utility. The indifference curve is so named because the consumer would be indifferent between choosing any one of these commodity bundles.
An illustration follows:
Hence, the illustration above shows three indifference curves: I1, I2 and I3. Each curve represents combinations of Good X and Good Y. Any individual on I1 is indifferent at any point on one particular curve, for example, any combination of Goods X and Y that lies on I1 is acceptable to the individual. In other words, he is indifferent to any of such combinations as theya re ranked equally and represented through one indifference curve. However, he will prefer I2 to I1 and I2 to I1 since I2 represents more of Goods X and Y.