Tag: consumer behaviour

INDIFFERENCE CURVES

In microeconomics, the study deals with the different individuals and their decisions and its effect on the economy. The decisions such as the level of consumption, savings, investment are never the same. But a consumer strives to get the best deal for his commodities which give him highest satisfaction given the budget constraint. The consumer tries to attain that point in the indifference curve where he can get the most utilities from both goods.

An indifference curve or IC is the graphical representation of combinations of two goods that yield the same level of satisfaction to the consumer. The indifference curve operates on the principle of diminishing Marginal Rate of Substitution(MRS). Every point on the indifference curve shows that an individual or a consumer is indifferent between the two products as it gives him the same kind of utility.

There is also a concept of indifference map which is the graphical representation of two or more indifference curves showing the various combination of commodities with different quantities, which a consumer consumes, given his income and the market price of both the commodities.

Before going forward with IC, let’s look what is Marginal Rate of Substitution.

Marginal Rate of Substitution is the rate at which a consumer substitutes some units of one good or willing to forego units of one commodity for additional units of another good which provides the same level of utility or satisfaction. MRS measures the changes in the units of consumption of the combination of two goods but does not influence the utility.

Formula for calculating is MRSxy = MUy / MUx = Px / Py

where,

MRSxy – Marginal Rate of Substitution of good x and good y

MUy and MUx – Marginal utility of good y and good x respectively

Px and Py- Prices of good x and good y respectively

The indifference curve is convex to the origin because of the diminishing Marginal Rate of Substitution.

ASSUMPTIONS OF INDIFFERENCE CURVES

  • There are only two goods, say good x and good y. It is also assumed that the prices of the commodities are constant.
  • The consumers are rational and thus aim to have the highest utility from the pair of goods. The consumer moves to higher indifference curves for attaining maximum satisfaction.
  • The utilities are ordinal because the utility or the amount of satisfaction cannot be quantified.
  • The income of the consumer is fixed. Thus, there is a budget constraint.
  • There is Diminishing Marginal Rate of Substitution where good y is substituted for good x.

PROPERTIES OF INDIFFERENCE CURVES

  • The indifference curve is convex to the origin due to the decreasing marginal rate of substitution. It can never be concave as it violates law of diminishing marginal utility.
  • The indifference curve is slopes from left to right as one commodity substitutes another.
  • The indifference curves never touch the axes because the assumption states that each point represents different utilities of two goods. If it touches the axes, the utility of one commodity becomes zero.
  • Higher indifference curves represent higher quantities of both the goods and thus higher utility.
  • Two indifference curves never intersect each other because the two curves represent different utilities.

From the above diagram, we can infer that point c is where the consumer is in equilibrium.

Consumer equilibrium is a situation in which a consumer purchases a combination of goods which gives him maximum satisfaction given the income and prices, he is not willing to make any changes in it.

Conditions for consumer equilibrium

  1. Slope of IC = Slope of price line (budget line)
  2. MRSxy=Px / Py

In U1, points a and e cannot be equilibrium points because there are opportunities for consumer to move to U2. Points b and d cannot be equilibrium points because at both points MRSxy is not equal to Px / Py.

At point c in U3, MRSxy= Px / Py and thus the consumer is in the state of rest and attains maximum utility.

The consumer cannot move to U4 because the prices of goods exceed the budget line of the consumer.

RELEVANT LINKS:https://corporatefinanceinstitute.com/resources/knowledge/economics/indifference-curve/ https://www.economicshelp.org/blog/glossary/indifference-curves/

Bargaining a consumer behavior

When a person wants to saves money during buying anything of its use it’s called bargaining, it’s a trick of saving money.

Bargaining or haggling is a type of negotiation in which the buyer and seller of a good or service debate the price and exact nature of a transaction. If the bargaining produces agreement on terms, the transaction takes place. Bargaining is an alternative pricing strategy to fixed prices. Optimally, if it costs the retailer nothing to engage and allow bargaining, they can deduce the buyer’s willingness to spend.

Bargaining means you are trying to get the best price without compromising on any features or benefits. It is competitive, aggressive and a win-lose strategy, and neither party is generally satisfied. On the other hand, negotiation happens in an environment of trust and openness. It is a win-win strategy where both the parties leave the table satisfied.

One of the most effective bargaining methods is to ask if buying multiple items together merits a discount. This is especially helpful when shopping for gifts.

Purchasing Negotiation is part art part science. 
If you have been led to believe that you must be the smartest man on planet Earth to be a successful negotiator, it is not so. Apart from having good skills as a negotiator, the most important factor is to Prepare.

This is where the psychological process comes in that you need to use persuasion, communication, verbal & nonverbal skills.

Basically there are 2 types of objectives and approaches to purchasing negotiation. The first is the Confrontational or Lose – Lose approach where you don’t care whether the suppliers makes or loses money. You just bang on the supplier to give you 20% discount no matter what.

Lose – Lose Approach

We call this lose-lose because while you may get the discount you want in the short term, that will come at the expense of quality, delivery times etc. So at the end while the supplier loses in the discount given the buying organization loses more than the discount given.

The second approach is that of Win-Win Negotiations. For example, when you write a price negotiation letter to the supplier, you want to be fair to the supplier and ensure that he makes a reasonable profit but he delivers the products/services with the highest possible quality and on time.

While Win  type is most talked about it happens in only about 20% of cases. Plus this is not easy, depending on who’s supervising the purchasing department and company culture.

  Deals fall through every day. But businesses that depend on long-term customer relationships have a particular need to avoid win-lose situations, since backing out of a bad deal can cost a lot of future deals as well. Some buyers resort to hardball tactics even when the salesperson has done a consummate job of selling. The premise is that it costs nothing to ask for a concession. Sellers can always say no. They will still do the deal. But many sellers—especially inexperienced ones—say yes to even the most outrageous customer demands. 

These is the scenario buying and selling of goods .does not matter you are rich or poor bargaining is the trend and behavior of  people .they likes to do these things because it’s a kind of sense of achievement after bargaining .