CHAPTER

CONSUMER
4V I O R
BEHA
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 Learning
Objectives
• D e fi n e t h e c o n c e p t o f u t i l i t y
• Discuss the assumptions of Consumer Theory
• D i s c u s s t h e I n d i ff e r e n c e C u r v e a s a m e a s u r e o f
utility; and
• I l l u s t r a t e i n d i ff e r e n c e m a p a n d b u d g e t l i n e .
 Consumer
Consumer Behavior
Theory
Argues that individual consumption decisions are always
made because people desire to maximize their satisfaction
from consuming various goods or services.

Utility- An individual’s pleasure, happiness, or satisfaction.

Example:
If a person buys a box of pizza, the assumption is that he/she
buys pizza as it gives him/her satisfaction.
 Assumptions Affecting Consumer
Theory
1.The spending on any good or services is exactly
equal to the individual's savings and income.
2.People are aware of the range of products available
in the market.
3.People are aware of the prices of the products in the
market.
4.People are aware of the capacity of the product.
 Measuring
Utility
Consumption Bundles- are certain combination of two commodities that
will yield consumer a certain level of utility.

Indifference Curve- shows combinations of two commodities which, when

consumed, will yield the same level of satisfaction.

Utility Function-shows an individual’s value of the utility attained from

consuming each conceivable bundle of goods.
• Cardinal Values- are based on the number of “util” or the unit of
satisfaction.
• Ordinal Values-are based on rankings

The Law of Marginal Utility-means that as you increase your intake of a

certain commodity, you will have a declining satisfaction on the next units
 No. of Coffee TU MU

Total Utility vs Marginal

Antonio’s Utility in Drinking Coffee

1 20 20
Utility
Total Utility (TU) Marginal Utility (MU 2 35 15

3 45 10
The total satisfaction gained The additional satisfaction
from consuming a given gained from consuming one
quantity of goods. more unit of a good. 4 50 5

Additional satisfaction from 5 53 3

Total satisfaction in utils.
one more unit.

6 55 2
Increases as more units are
Decreases due to the Law of
consumed but at a decreasing
Diminishing Marginal Utility.
rate. 7 56 1

Rises at first, then flattens and Downward-sloping (decreasing 8 56 0

eventually declines. with each additional unit).

9 56 -1
It illustrates the previous table
through a graph. It shows an
increasing TU, but decreasing MU.
This behavior is what we call the
law of diminishing marginal utility.

Total Utility, Marginal Utility, and their Relationship

 Combination of X and Y that will
Give Missy a Satisfaction Rating of
5
Quantity of Quantity of Y
Point
Good X needed needed

A 1 6

B 2 4

C 4 2

D 5 1.5 Graphical Representation of the

Combination of Goods X and Y

MARGINAL RATE OF SUBSTITUTION (MRS)

is the maximum amount of good that a consumer is willing to give up to obtain
one additional unit of another good.
Computing (MRS) using the
Equation:
where:
• ΔY is the change in the quantity of Good
Y,
• ΔX is the change in the quantity of Good
X.
 Properties of Consumer
Preferences
Completeness- means that in every pair of consumption bundles( X
and Y), the consumer can say one of the ff:
• X is preferred to Y
• Y is preferred to X
• The consumer is indifferent between X and Y

Transitivity- it means that if X is preferred to Y, and Y is preferred to

Z, then X must be preferred to Z.

Non-Satiation- means more is better. Consumers always receive

happiness from more, or atleast can freely dispose of any excess from
that.
 Indifference
Map a set of indifference
An indifference map is a graph containing
curves showing two commodities among which describe a person’s
preferences.
We can say that any value that would
lie on indifference curve III, such as
point A, is preferred to any point on
curve II, which in turn is preferred to
any point on I, such as C.
Indifference Curves do not
intersect.
 Budget Line
Budget line is a graph that shows the combinations of goods or services f a person,
where the total amount of money spent is proportionate to his/her income. It
assumes that all people spend within the level of their income.

Basket of Household items

Food(15/unit) Total Budget
Goods (30/unit)

A 0 460 13,800

B 230 345 13,800

C 460 230 13,800

D 690 115 13,800

E 920 0 13,800

Yanna’s Budget for Food and Household

If the budget line is the combination of goods and services of a person, where the
total amount of money spent is proportionate to his/her income, line AE will be
Yanna’s budget line.
Assuming that the prices
would not change, we can
expect that a change in
income causes the
budget to shift to the
right.
Assuming there is an increase in prices, we can expect a
decrease in demand as well.
We can expect Yanna’s purchases shift to the
left.
 Consumer’s
• The decision must lie on the budget line.
Choice
• The decision must lie on the indifference curve that is
depicting the most preferred combination of the
consumer.
• Point 1 represents quantities of commodities X
and Y that Sassa will consume and will yield
100 utils of satisfaction level purchased at the
highest possible budget of P5,000
• Point 2 represents quantities of commodities X
and Y she will consume and will yield 100 utils
of satisfaction level, which can be purchased at
a lower possible budget of P4,000.
• Point 3 represents quantities of commodities X
and Y that she will consume and will yield 100
utils of satisfaction level, which can be
purchased at the lowest possible budget of
• Point 1 represents the combination of
quantities of commodities X and Y that
can be purchased with the given budget
of P5,000, which when consumed will
give a level of 100 utils.
• Point 2 represents the combination of
quantities X and Y that can be
purchased at a given budget of P5,000,
which when consumed will give a
higher level of satisfaction of 200 utils.
• Point 3 represents the combination of
quantities of commodities X and Y that
can be purchased at a given budget of
P5,000, which when consumed will give
the highest level of satisfaction of 300
utils.
Engel Curve- shows the relationship
between the amounts of product that
people are willing to buy and their
corresponding income.

We can see that income consumption

line was formed from indifference
curves of the individual with different
budget lines. It forms an Engel Curve
with an increasing trend. This
relationship shows that the two
commodities are both normal goods.
As income increases, the quantity
bought also increases.
It forms a n Engel Curve with a
decreasing trend.
This relationship shows that the
commodities are both inferior goods.
As income increases, the quantity
bought decreases.
The
End.
Quiz Time