Chapter 5: Consumer Behavior & Utility Maximization

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.

The right to be informed

Consumers make purchasing decision often. The quality of

their decisions however will depend on whether or not
thay 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

Factors that affect Consumer Behavior

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
INCOMEThe amount of earnings that consumers get from their
work also affects spending or con suming habits. Save or
dissave
PRICES The prices of goods and services also have considerable
effect on the consuming habits of people
Psychological Factors Persons purchases are also influenced
by motivation, perception, learning beliefs and attitudes Another
psychological factors is the built in preferences of individual
5. Cultural Factor Practices that result from influences in ones
heritageEx. Fiesta,
Social Factors People tend to be influenced by their reference
groups-friendsPeer pressures tends to be strong among young
people
Social Factors People tend to be influenced by their reference
groups-friendsPeer pressures tends to be strong among young
people
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

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

It is the right of every consumer to get just compensation

from the harm inflicted by the product that he consumed.

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.

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
a. Allocate the entire available budget.
b. 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.

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.

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
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.

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

tu2 = new total

tu1 = original total
q2 = new quantity
consumed
q1 = original
quantity consumed

Important measures of utility

LAW OF
DIMINISHING MARGINAL UTILITY
-STATES that as additional units of a good
are consumed, the additional utility derived

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:

from each additional units tends to diminish

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

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

MRS= change in food

consumption
change in
clothing consumption

Indifference Schedule
Food
Clothing
MRS
Consumption Consumption
56
1
--46
2
10
37
3
9
29
4
8
22
5
7
16
6
6
11
7
5
8
8
4

5
3
2

9
10
11

3
2
1