CHAPTER 5: CONSUMER BEHAVIOR & UTILITY MAXIMIZATION

CONSUMER
One who demands and consumes goods and services that satisfy the his
needs and wants directly.
Has the power to determine what are to be produced and the ultimate
purchaser of goods and services.
the one makes decision on what to buy and how to spend his money
Sends signals to the producers on what goods he needs to be available in the
market
THEORY OF CONSUMER BEHAVIOR
The idea behind the theory of consumer behavior is that consumers make their
choices based on their incomes, prices of goods and their own preferences.
FACTORS THAT AFFECT CONSUMER BEHAVIOR
1.WEALTH
A persons wealth affects how he consume goods. More wealth leads to higher
consumption and this leads to higher consumption. This behavior is called wealth
effect
2. INCOME
The amount of earnings that consumers get from their work also affects spending or
consuming habits.
Save or dissave
3. PRICES
The prices of goods and services also have considerable effect on the consuming
habits of people.
4. PSYCHOLOGICAL FACTORS
Persons purchases are also influenced by motivation, perception, learning
beliefs and attitudes
Another psychological factors is the built in preferences of individual
Maslows Theory sought to explain why people are driven by particular
needs at particular times
Based on this theory a person will try to satisfy the most important needs
first. When a person succeeds in satisfying an important need, he will be
motivated to satisfy the next most important need
Perception can be defined as process by which an individual selects,
organizes and interprets information to create meaningful picture of the
world.
Learning describes changes in an individual behavior arising from
experiences
Ex, if a consumer perceives and believes that coke is the best softdrink, he will buy
coke.
5. CULTURAL FACTORS
Practices that result from influences in ones heritage
Ex. Fiesta,
Some people have preference for the music of Mozart while others would go crazy
over Justin Beiber
Toilet paper maybe a common thing for the urban dwellers but could be rare in the
people who live in the mountain.
6. SOCIAL FACTORS
People tend to be influenced by their reference groups-friends

Peer pressures tends to be strong among young people.

The kind of clothing people wear reflects his respective role and statuses. A
company president will tend to drive a mercedes benz car
7. PERSONAL FACTORS
Buyers decision are also influenced by personal outward characteristics such as
age, occupation, economic circumstances, personality and lifestyle personality and
self concept.
The Consumer Rights
1.The Right to be safe
Consumers expect that the products and services that they buy will do them
no harm
Consumers expect to be free from bodily harm when they are inside the
entrepreneurs business premises
Ex. Manufactured drugs intended for sale to the general public must first pass the
standard requirements of the FDA
The purpose is to guarantee the public that the drugs are safe to use
2.The right to be informed
Consumers make purchasing decision often. The quality of their decisions
however will depend on whether or not they are properly informed.
Advertisements and information ads printed on its label are ways to provide
information to consumers about products or services.
Date of manufacture, expiry dates
3.The right to choose
Firms that intend to adhere to business ethics should strive to protect the
consumer rights to choose what product and services they need and intend
to purchase
Ex. Right to choose between branded and generic medicines
4.Right to be heard
Consumers have the right to communicate their concerns to
entrepreneurship.
This right is to express their concern on the product they purchased or used
This right maybe appreciation of the product or complaints on the products
Company must print their contact no. on the label of the product so that
problem could be relayed
5.Right to just compensation from harm
It is the right of every consumer to get just compensation from the harm
inflicted by the product that he consumed.
PROTECTING THE RIGHTS OF THE CONSUMERS
the Phil government has formed different agencies such as the Department of
Trade and Industry that is responsible for the implementation of the laws for
the consumers and the Bureau of Foods and Drug, the agency responsible for
safe food, drugs, cosmetics that will be consumed by the people
This ensures that the producers will not take advantage of the consumers
Consumption refers to the use of goods and services to satisfy needs and
wants.
Consumer Goods
-These are the goods that yield satisfaction directly to any consumer.
Essential or Necessity Goods vs. Luxury Goods

Necessity Goods
- are goods that satisfy the basic needs of man.
Luxury Goods
- are goods that people lived even without but which are used to contribute to his
comfort and well being.
Economic and Free Goods
Economic Goods - is that which is both useful and scarce. It has value attached to
it and a price to be paid for its use.
Free Goods - when goods are abundant that there is enough to satisfy every ones
need without anybody paying for it.
The Utility Theory
Utility in economics, it refers to the satisfaction or pleasure that an individual
gets from the consumption of a goods the purchased.
consuming an extra unit of a good or services.
Mathematical derivation of Marginal Utility
Simply the change in total utility divided by the change in quantity.
MU
=
Tu2 Tu1
Q2 Q1
Where:
tu2 = new total
tu1 = original total
q2 = new quantity consumed
q1 = original quantity consumed

Maximizing Total Utility

As consumers, we have our own unique way of maximizing our satisfaction or
utility. We are given to maximize our satisfaction by continuously consuming
more units of a certain good until our satisfaction falls down to zero.
Utility Maximization Rule
Allocate the entire available budget.
Make the marginal utility per peso spent the same for all goods.
Consumer Surplus
Is the difference between the total amount thee the consumer willing to pay
and the total amount that actually pay for the goods and services.

Illustration:
Suppose you are interested in buying new Maong Pants. You went to
the Mall to look for the Pants you wanted so much. Your budget is P 3,000. when
you went to the boutique, you found out that the pants you liked most cost only P 2,
500. what is now your consumer surplus?
Budget Line
Shows the various combination of two products that can be purchased by the
consumer with its income, given the price of its products.
Hypothetical table for Budget Line

Purpose of a Budget
The purpose of budget is not to spend more than what you have. It tracks the
incoming and outgoing money.
Consumer use budgets so that they have savings at the end of the month for
other economic consumptions.

Unit 7-UTILITY FUNCTION

Utility
is the technical term used for satisfaction.,
it is intangible as such it is not easy to measure,
is one unit of satisfaction (UTILS)
A CONSUMER aims to maximize the satisfaction he derives from the use of
goods and services
UTILITY FUNCTION
SHOWS THE relationship between utility and consumption.
In equation form:
U = f (C)
Utility is a function of Consumption
Important measures of utility
TOTAL UTILITY (TU) is the total amount of satisfaction derived from consuming
certain units of goods and services
MARGINAL UTILITY refers to additional utility derived from consuming an
additional unit of the good
This functional relationship assumes two forms and is quantitatively defined as
TU = Function of Q (Consumption)
MU = change (TU) satisfaction from an addl
----------------unit of consumption
change Q
Mathematical derivation of Marginal Utility
Simply the change in total utility divided by the change in quantity.
MU
=
Tu2 Tu1
Q2 Q1
Where:
tu2 = new total
tu1 = original total
q2 = new quantity consumed
q1 = original quantity consumed
Hypothetical Utility Schedule of Rene for Chocolate bARS
Quantity of
TU
MU
Consumption
1
8
8
2
15
7
3
21
6
4
26
5
5
30
4

6
7
8
9
10

33
35
36
36
35

3
2
1
0
-1

When Rene eats the first bar, he gets the utility of 8. Eating the second bar
gives him the utility of 7.
His total utility increases with each additional chocolate bar, the additional
utility becomes less. The satisfaction he gets from each additional units
becomes to decrease
Upon eating his 9th bar, there is no additional utility, that is why MU at 9 is
equals to zero.
As he consumes the 10th bar, instead of increasing, TU declines and MU
becomes negative
Physical discomforts such as stomach upset, dizziness and indigestions are the
signs that instead of adding to ones utility, the consumption of the additional unit of
good has resulted in the decrease of TU derived
What could be the reason for this behavior?
The satiation of human wants. Mans wants can be fully satiated at a given
time.
That is why owners of the eat all you can restaurant do not lose money. At
some point, they will simply giving up eating because their wants have been
satisfied
The above situation illustrates the
LAW OF DIMINISHING MARGINAL
UTILITY
-STATES that as additional units of a
good are consumed, the additional
utility derived from each additional
units tends to diminish

INDIFFERENCE CURVE
How does a consumer maximize the
satisfaction derived from the use of a
good or a service??
One tool can be used is the
indifference curve..
What is indifference curve???????
Indifference curve shows various
combinations in the consumption of
two commodities that will give
consumers the same level of
satisfaction

 All points representing the combinations, when connected will result in the
indifference curve
The relationship shown in this assumption of the goods is inverse.
Consumption of more pears leads to a decrease in the consumption of
oranges
All these combinations will result in the level of satisfaction of consumers

The
MRS (MRS of food to clothing is measured as follows, which is simply how much food
one has to give up to consume an additional unit of clothing
MRS= change in food
consumption
change in clothing
consumption
Food
Clothing
MRS
Consumption Consumption

56
46
37
29
22
16
11

1
2
3
4
5
6
7

--10
9
8
7
6
5

8
5
3
2

8
9
10
11

4
3
2
1

THE BUDGET LINE

The consumers budget line sets the limitation on what he or she can afford to buy.
It can be constructed for a given budget based on the prices of two goods
Purpose of a Budget
The purpose of budget is not to spend more than what you have. It tracks the
incoming and outgoing money.
Consumer use budgets so that they have savings at the end of the month for other
economic consumptions.
Example Consumer Isabel has a weekly budget of P500 to spend on pasta and
bread. Let us assume that the price of pasta is P100 per serving and the price of
bread is P50/slice
Consumption Schedule for Pasta and Bread
Pasta
Bread
Total Cost
0
10
P500
1
8
500
2
6
500
3
4
500
4
2
500
5
0
500
Plot the consumers budget
The Paradox of Value
States that while water is a more important commodity than diamond, water is
cheap and diamond is expensive because water is abundant while the supply of
diamond is scarce
Water which is valuable and gives high utility is cheap. While diamond which has a
little utility is expensive
The explanation of this lies in the law of supply and demand
ADVERTISEMENTS
PROMOTion and advertising serve as an avenue for introducing new products in the
market which create demand and consumption.
-Gives more information about the product
However, some advertisements do not tell the real quality of the product.
They are merely devised to attract consumer to buy the product