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A different curve shape indicates an unalike willingness for the substitute. Let us analyze a graph and consider two examples to understand this. In a certain figure, it shows how Bob prefers for apple and orange juices. Since, Bob remains indifferent between the two drinks; they are the examples of perfect substitutes.

The MRS is 1 in case of apple juice over orange juice. Bob is ready to substitute a glass of apple juice over a glass of orange juice. Two items are said to be the perfect alternatives when there is a constant MRS of one item with the other. Indifference curves that signify the substitution between items are in fact not curved, but straight lines.

Also, it is not necessary for a perfectly substituted indifference curve to have the slope as If a graph is plotted with 16 MB SD cards on the vertical axis, then, the inclination will be -2 in the indifference curve.

Now the same graph depicts another situation where Jane prefers left shoes over right shoes. In this example, the two items are a perfect complement of each other because the purpose of one will remain incomplete without another. Since, Jane is not ready to part with any of her shoes for any other; the MRS for this case is 0. So, the shapes of indifference curves are two right angles.

So far, we discussed all the cases which have advantages. These are all the cases where more quantity of an item is preferred over another which is less.

However, there are some disadvantages or bad things as well. These are the things where less is preferred over more. With this consideration, all the four fundamental assumptions that we considered for the formulation of consumer paragon stay valid. It is not always necessary to have a numerical satisfaction level to each market basket.

The curve indicates that the market basket A or for another market basket on the indifference curve U 3 provides a feeling of higher satisfaction rate than any other market basket U 2. Consumer paragons are built on the assumptions that consumers provide ranks to the respective market baskets.

Quite times, it is also beneficial to allocate numerical standards to separate baskets. This leads us to explain consumer preferences by providing numerical scores to each level of satisfaction linked with all indifference curves. This technique is called utility. Utility is used by consumers to possess items that give them a feeling of satisfaction and not those that give them a sense of pain. Utility thus, simplifies the rankings of market baskets.

It is a specific formula linking to a certain utility level of each individual market basket. For example, let us consider a case, where C denotes clothing and F denotes the utility function for food.

Utility function is u. However, any one of the two discussed market baskets is preferred over a third market having 4 food units and 4 clothing units.

The market basket named A can be seen positioned on the highest level of 3 indifference curves denoted b U 3. Its utility level may be 3. But in case of market basket B,it is positioned on indifference curve U 2. The utility level may be 2, on the indifference curve U 1. The utility level of market basket D is 1. This means, that, both indifference map and utility function solves the same purpose.

This indicates that the satisfaction level is the product of C clothing units and F food units. The indifference curves linked with these functions is shown in the figure. The indifference curves linked with the utility function FC and 4FC differ by numbers not by 25, 50 and but by , and Utility function, thus, is a way to rank different market baskets. No information can be obtained by the magnitude of two market baskets and their utility difference.

The only thing that we know is that the measurement of utility is depicted by indifference curves. But we are unaware how much of one item is preferred over another. This is why the utility function generating a ranking of the market baskets is termed as ordinal utility function. Rankings which are linked with ordinal utility function and which positions market baskets in order of their preference, they start from most preferred to the ones which are least preferred. There is catch in this ordinal utility function.

Who will be happier to get the textbook? This is uncertain, as the numerical values are random and hence to carry out this comparison is not possible. The economists worldwide earlier believed that in terms of basic unit individual preferences is possible to be measured. And therefore, providing a ranking for interpersonal comparisons is possible. This would straight away mean that Jane receives two times as much satisfactory result as Bob.

But, the numerical values which are assigned to the market baskets in this manner actually have no meaning, and gives rise to the cardinal ranking. Cardinal utility is a measurement of the utility function that determines the preference one market basket and by how much is it desired over another. The important thing that one should know is how a consumer ranks the different market baskets.

So, the major work revolves around ordinal utility functions. Whatever discussion we made so far is on the very principal element of consumer paragon, which are the preferences of buyers. Now, we will study the additional element of consumer paragon, which is the budget constraint that is because of a finite income. Let us consider an example, where a person has a limited income, I.

He needs to purchase F units of food and C units of clothing. Let the two items have prices that are denoted by P F and P C respectively. As, we are not considering saving and other expenses here, so we assume that all the earnings of the consumer is spent on both clothing and food. Accordingly, the combination of what he can purchase will be:. There is a list of the various combinations of clothing and food that he can purchase every week.

Had he spent his entire income on clothing, he could buy 40 units of clothing. This is represented as A market basket. On the other hand, if the entire budget was spending on food, he could purchase 80 units of food. This is represented as G another market basket.

These are indicated by E, D and B respectively. The budget line linking to market baskets of this table is indicated with the help of a graph. As its out come, the budget line is straight, beginning from point A and going up to point G.

Basket A indicates the intercept. As the man moves along that particular line from basket A to G, he tends to spend more on food and less on clothing. Now a certain equation tells us the amount of C given away to have more of F. If we divide the L. S and the R. S of the equation with the help of P C , we will have:. The above equation represents a straight line. The magnitude of the inclination indicates the rate where the two items can be switched with each other destituting a change in the total amount of spent money.

The vertical intercept signifies the maximum quantity of C which can be bought with income I. The parallel intercept signifies the specific unit numbers of F that can be purchased if the entire income was allowed to spend on it.

Income and price of goods P C and P F influence the construction of a budget line. However, there often happens a change in prices and income. Let us see the effect of changes on the construction of the budget line. From a certain equation, we can observe that an income change is the reason of vertical interception of the budget line.

However, it does not alter the inclination as the cost of either of the two items remains unchanged. This is shown in figure 3.

If the consumer that we are talking about desires, he can double his purchase of clothing and food. Let us understand the situation, when there occurs a change in the cost of one item without a change in the cost of another.

This equation can be used to analyze the effect of a change in the cost of food on the budget line. A new budget line is obtained which is denoted by L 2 and by rotating the actual budget line L 1 outward, thus spinning from the C-intercept. This is represented in figure 3. The rotation is necessary as a person who consumes only food but not on clothing, food remains unaffected by the change in price of the food items.

But, a person who consumes food in a large amount will tend to purchase more by this price decrease of food item. So, the ability to purchase sees a decline. Now, in this scenario, the person consuming clothing only, would remain unpretentious by the change in food price. Now, let us see, what happens when the prices of clothing and food both change. The inclination of the line will remain the same. This is because; the inclination of the budget line is equivalent to the ration of the two values costs.

However, there must be a shift in the intercept, such that the new line remains comparable to the earlier line. In that case, there is no change in the inclination of the budget line, but there occurs a doubling of the intercept and the budget line shifts outward. Thus, we can say that acquiring power is resoluted not only by the income of a person, but also with the help of prices of items.

This state is known as a stage of inflationary economy. Since there occurs a two fold increase in the prices of both the items, so there occurs no change in the ratio of the costing. Consequently, there happens no change in the inclination of the budget line. Now since the income has also doubled, the maximum clothing units that can now be purchased indicating the vertical interception remaining unaffected.

The same holds correct for food. So, the conclusion is, when both income and prices see a proportionate increase, the purchasing power or the budget line remains unchanged.

Consumers have their own preferences. Also, they do have budget constraints. So, with these two conditions, how can a consumer choose the amount of goods to purchase? We believe that there is consumers take this decision in a logical way. They take into account their feeling of satisfaction. The increase the quantity of goods that provide them the maximum satisfaction. This maximization of market baskets should fulfill the following conditions.

The two conditions are the answer to the issue of maximum consumer satisfaction. In the clothing and food example, that we are considering, we can explicitly indicate the solution to the choice issues of consumer. Among the three different curves, it is the last external curve, U 3 that gives the maximum feeling of satisfaction.

The curve U 2 is the next highest while the curve U 1 is the minimal one. Observe carefully, that B on curve U 1 is not the preferred choice as reviewing of income and then spending is less on clothing and more on food can upsurge the satisfaction level of the consumer.

When we move towards point A, the purchaser is seen to spend similar monetary amount and achieve an increased satisfaction level that is linked with the indifference curve U 2. Baskets that are positioned to the right side and overhead indifference curve U 2 example, the market basket linked with point D on indifference curve U 3 , though achieves a higher satisfaction level, yet it cannot be bought with the income that is available.

Thus, the point A indicates, maximum consumer satisfaction. This analysis clearly means that the market basket which increases the satisfaction level, lies on the peak indifference curve that gets connected to the budget line. The point A, indicates tang ency between the budget line and indifference curve U 2 , and the inclination of the budget line at this point, equals the inclination of the indifference curve.

Since, there is a negative sign in the inclination of the indifference curve, the satisfaction attains the maximum level even though there is a budget constraint at even the point where,. This result holds significance. Note here, that Satisfaction attains the maximum level, when F for C the marginal rate of substitution gets equivalent to price ratio of F to C.

Therefore, by adjusting the consumption of merchandises, C and F, and keeping the MRS same to the ratio of the prices, a consumer can obtain the maximum satisfaction. The condition is stated in a graph which suggests the various kinds of economic optimizations. Satisfaction attains the maximum level once the marginal benefit benefit that is linked to the utilization of one additional food unit equals the marginal cost price of an additional food unit.

For example, point B indicates that the consumer is buying30 clothing units and 20 food units. As an outcome of this, without any loss in the satisfaction level, the purchaser is able to exchange 1 food unit for 1 clothing unit.

He will still continue to maintain his satisfaction level, as only one clothing unit is required for that. This indicates that our consumer is willing to exchange one clothing unit for two food units. This MRS result is illusive only. Consider a case, when two consumers have just bought certain quantities of clothing and food. However, we cannot find out the amount of each of the goods.

This decision is arrived by measuring individual preferences. Even if MRS is same for two consumers, they will tend to consume different clothing and food quantities. This can influence their buying decisions. In relation to example 3. Each of the groups has different inclinations for acceleration and size. An automobile company will utilize statistical studies and marketing to learn the broad set of attributes of different consumer groups. The firm can come up with a marketing and production plan by combining the information of all the features that affect the manufacturing costs.

One profitable option could be to market by highlighting acceleration to a somewhat lesser degree that is favored by those in figure. The second option could be to manufacture larger car numbers, emphasizing a smaller number acceleration and size. To have knowledge of predilections of each group, along with info about the buyers, would help the company to make a better and sensible business decision. A similar kind of survey was prosecuted by the General Motors on a large number of vehicle purchasers.

The result they obtained was functionality was preferred over style by households with that of children. So, they preferred minivans over sporty and cars sedans. In a different case, rural households preferred pickups and wheel drives. An interesting relationship was found between preferences and age. Consumers, who were older, prefer heavier and larger cars with additional accessories and safety features. Younger consumers however preferred stylish cars with more horsepower.

Figure a shows, having a budget constraint, consumers willing to substitute some extra amount of interior space for some amount of acceleration.

Figure b represents the opposite of this. Often consumers are seen to purchase goods in excess. There are some people, who prefer not to spend a penny on entertainment and travel. The circumstances under which buyers choose not to use a particular group can be represented using indifference curves.

He prefers to buying only ice candies IC and not frozen yogurt Y. Decision like this is said to be a corner solution. The consumption bundle gets formed at the graph corner, when one of the eatables is not consumed. The point B indicates the maximum satisfaction, where the MRS of ice candy is more than the incline of budget line.

The inequality indicates that if the purchaser had more yogurts to trade off, he would gladly do it for an additional ice candy. It is about studying the customer psychology. Hence, it is not just another branch of marketing. It is a blend of marketing, psychology, economics and Sociology. It is a demanding subject that requires you to put many hours in researching about the consumer behavior itself.

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The entire setup is divided into three major roles of user, payer, and buyer. It is a proven fact that predicting consumer behavior is a difficult task. Even the experts in the field fail to make the right decision when it comes to consumer buying behavior. So you can predict how difficult it can be for a beginner who has just started learning the basic concepts of consumer behavior.

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Consumer Preferences, Budget Constraints, Consumer Choice, Corner Solutions, Revealed Preference, Consumer Choice and Marginal Utility and Cost-of-Living Indexes.

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Theory of Consumer Behavior Assignment and Online Homework Help Theory of Consumer Behavior Assignment Help DEFINITION The research of how individuals choose exactly. Consumer Behavior Questions and Answers - Discover the community of teachers, mentors and students just like you that can answer any question you might have on Consumer Behavior.