THEORIES OF CONSUMER BEHAVIOR

I.
UTILITY THEORY
INDIFFERENCE THEORY

William Stanley Jevons Analyz in total utility (TU) and marginal utility (MU) utils is the unit of measure Consumer satisfaction can be measured thru TU and MU

Vilfredo Pareto Described thru Consumers preference of various combinations of goods and services based on nature NOT on total utility and marginal utility

II. UTILITY THEORY

A. Utility Schedule for Siomai
Piece/ Unit
0 1
Total Utility (TU) Marginal Utility MU=TU/ Q

0 14
25 33 38 41 43 43 41 38 33 25 14 0

0 14
11 8 5 3 2 0 -2 -3 -5 -8 -11 -14

Consumers satisfaction is measured using UTILS

2 3 4 5 6 7 8 9 10 11 12 13

B. Plot the value on the X and Y axis

Y-Values
50 45 40 35 30 25 20 15 10 5 0 0 5 10 15 Y-Values

C. TOTAL UTILITY CURVE Connect the points. Then, observe the shape of the graph.
Y-Values
50 45 40 35 30 25 20 15 10 5 0 0 5 10 15 Y-Values

 satisfaction derived in goods decrease as additional number of the same good is utilized

MU = TU (TU2- TU1) Q (Q2- Q1)

MARGINAL UTILITY (MU) CURVE

Y-Values
20
15 10 5 0 -5 0 -10 5 10 15 Y-Values

-15
-20

> Modern approach in understanding consumer behavior > Analysis is based on consumer preferences of various combinations of goods and services depending on its nature

A. INDIFFERENCE SCHEDULE OF FOOD & CLOTHING FOOD (X) AND CLOTHING (Y)

350
230 150

40
80 120

90
60 40 30

160
200 240 280

B. Plot the Indifference Schedule

Y-Values
300 250 200 150 Y-Values

100
50 0 0 100 200 300 400

C. Indifference Curve (Single Curve)

Y-Values
300 250

200
150 100 50 0 0 100 200 300 400 Y-Values

Indifference Curve = locus of points wherein each point represents a combination of goods and services that will give equal level of satisfaction to a consumer

D. Indifference Map
Y-Values
300 250 200 150 100

Y-Values

50
0 0 100 200 300 400

E. RULE in reading the ICs The farther the IC from the point of origin OR as we move upward from the origin going to the right the higher is the level of satisfaction. Thus, farther curves are more preferred .

F. Important Properties of IC
1) IC slopes downward (negative slope), therefore, consumer adds 1 unit of food, she/he needs to deduct 1 unit of clothing. REASON: budget constraint 2) IC is convex to the point of origin, therefore, curve becomes flatter as it goes down from point A to G. Hence, slope decreases and it is said to be convex. 3) IC does NOT meet or intersect at any point. 4) IC reflects preferred combinations of goods/ services, therefore, IC moves to the right to show higher levels of utility.

G. MARGINAL RATE OF SUBSTITUTION

MRS = Product (X) Product (Y)
CLOTHING
40 80 120 160

FOOD (Y) 350

230 150 90

MRS (X) 0
3 2 1.5

60
40 30

200
240 280

.75
.5 .25

KEY WORDS:
budget constraint = what consumers can afford to buy based on her/his cash on hand preference = what they WANT to consume is what they buy Marginal Rate of Substitution MRS = X2- X1 Y2- Y1