CHAPTER 4- CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION

CONSUMER- king in a capitalist or free market economy; one who demands and consumes goods and services
CONSUMER SOVEREIGNTY- power to determined what are to be produced
*According to Pass and Lowes, producers are passive agents because the producers simply obey the wishes,
desires, needs and wants of the consumer.

TYPES OF GODS AND SERVICES

1. Consumer goods- everything that yields satisfaction to consumers
2. Essential goods- these are necessity goods; goods that satisfy the basic needs of man
3. Luxury – goods for leisure
4. Economic- both useful and scarce; it has vale attached to it and a price to be paid for its use
5. Free good- good that is abundant and that there is enough of it to satisfy everyone’s need without
paying for it

FACTORS AFFECTING TASTES AND PREFERENCES

1. age
2. income
3. education
4. gender
5. occupation
6. customs and traditions or culture

MASLOW’S HIERARCHY OF NEEDS

1. Physiological needs- basic needs for sustaining human life itself; food, water, warmth, shelter, sex and
sleep
2. Safety needs- needs to be free f danger and the fear of losing one’s work, property, food, shelter
3. Social needs- needs cover the value of the sense of belongingness, love, care, acceptance and
understanding of family, friends, relatives and to be accepted by others
4. Esteem needs- needs explain the importance of self-esteem, recognition, status and the general
acceptance of; an individual; power, prestige, status, self confidence
5. Self Actualization- explain the worth of person’s development, growth, realization and achievement

UTILITY THEORY
UTILITY- refers to the satisfaction or the pleasure that an individual or the consumer gets from consumption of
goods and services that he/she purchases
UTILS- measurement of utility
MARGINAL –means additional/extra
MARGINAL UTILITY- additional satisfaction that an individual derives from consuming an extra unit of good or
service
TOTAL UTILITY- the total satisfaction that a consumer derives from the consumption of a given quantity of a
good or service in a particular time period
LAW OF DIMINISHING MARGINAL UTILITY- states that as a consumer gets more satisfaction in the long run, he
experiences a decline in his satisfaction of goods and services; we consume more and more of a good or
service, we like it less and less, as we consumer increasing amounts of a good or service, we derive diminishing
utility or satisfaction from each additional unit consumed

HYPOTHETICAL UTILITY SCHEDULE

UNIT TOTAL UTILITY MARGINAL UTILITY
1 40 40
2 90 50
3 170 80
4 270 100
5 350 80

Formula: MU= ∆TU = TU2-TU1

∆Q Q2-Q1
CONSUMER SURPLUS – measure of the welfare we gain from the consumption of goods and services; measure
of the benefits that we derive from exchange of goods
INDIFFERENCE CURVE- line that shows combination of goods among which a consumer is indifferent

HYPOTHETICAL TABLE FOR CONSUMPTION OF MEAT AND FISH

COMBINATION MEAT (KG) P OF MEAT FISH (KG) P OF FISH
A 5 500 1 100
B 4 400 2 200
C 3 300 3 300
D 2 200 4 400
E 1 100 5 500

MARGINAL RATE OF SUBSTITUTION- rate at which a person will give up good y to get more of good x and vice
versa
BUDGET- purpose of which is not to spend more than what you have

CHAPTER 5- PRODUCTION AND COST

PRODUCTION – refers to any economic activity which leads to combination of four factors; land, labor, capital
and entrepreneurship to form an output that will give satisfaction to consumers; process of converting inputs
into outputs
TECHNOLOGY- body of knowledge applied to hw goods are produced, production of process employed by
firms in creating goods and services
a. labor intensive- more labor resources than capital resources; usually employed by economies where
labor resources are cheap
b. capital intensive- utilizes more of capital resources than labor resources; employed by industrialized
economies where capital resources are cheaper than labor like Japan, US, Germany
FIXED INPUT- any resource the quantity of which cannot be readily changed when market condition indicates a
change in output is desirable
VARIABLE INPUT- can be easily change in reaction to changes in the output level
TOTAL PRODUCT- refers to the total output produced after utilizing the fixed and variable inputs in the
production process
MARGINAL PRODUCT OF AN INPUT- extra output produced by an additional unit of that input
MP= ∆TP = TP2-TP1
∆I IL2-IL1

HYPOTHETICAL PRODUCTION SCHEDULEOF T-SHIRTS

INPUT TP MP AP
1 8 8 8
2 20 12 10
3 37 17 12
4 57 20 14
5 72 15 14
6 80 8 13
7 85 5 12
8 88 3 11
9 86 -2 10
10 82 -4 8

LAW OF DIMINSHING RETURNS- holds that we will get less and less extra output when we add additional
doses of an input while holding other inputs fixed; the marginal product of each unit will decline as the
amount of that input increases, holding all other inputs constant
RETURNS TO SCALE
CONSTANT- indicates a case where a change in all inputs leads to a proportional change in output
INCREASING- economies of scale; happen when an increase in all inputs leads to a more than proportional
increase in the level of output
DECREASING- when a balanced increase in all inputs leads to a less than proportional increase in total output

COST-refers to all expenses incurred in the production process

EXPLICIT- payments to non-owners of the firm
IMPLICIT-opportunity costs of using resources owned by the firm

FIXED COST- overhead or supplementary cost; those expenses which are spent for the use of fixed factors of
production; rents, interests, salaries, expenses on machine, depreciation
VARIABLE COSTS- prime or operating costs, expenses change as a consequence of a change in quantity output
produced

TOTAL FIXED COST- consists of costs that do not vary as output varies and must be paid even output is zero
TOTAL VARIBLE COSTS- costs that are zero when output is zero and vary as output decreases or increases

AVERAGE FIXED COST- total fixed cost divided by the quantity of output produced
AVERAGE TOTAL COST- total cost divided by the quantity of output produced

MARGINAL COST-cost of producing one additional unit of output

MP= ∆TC = TC2-TC1
∆Q Q2-Q1
PRODUCTION SCHEDULE
Q FC VC TC MC AFC AVC ATC
0 100 0 100 - - - -
1 100 40 140 40 100 40 140
2 100 68 168 28 50 34 84
3 100 90 190 22 33 30 63
4 100 115 215 25 25 29 54
5 100 148 248 33 20 30 50
6 100 195 295 47 17 33 49/50
7 100 260 360 65 14 37 51
8 100 350 450 90 13 44 56/57
9 100 460 560 110 11 51 62
10 100 600 700 140 10 60 70