Theory of Individual Behavior will occur when the consumer will consider both the

marginal utility MU of goods and the price. This behavior

Consumer – is an individual who purchases goods and
services from firms for the purpose of consumption.
Consumer Opportunities – represent the possible goods
and services consumers can afford to consume.
2 APPROACHES
1. Utility Approach
Utility – the ability of a good to satisfy human wants
can be observed most frequently when consumers
allocate their limited income between various goods so as
to obtain maximum satisfaction.
Consumer preferences are defined as the subjective
(individual) tastes, as measured by utility, of various
bundles of goods. They permit the consumer to rank
these bundles of goods according to the levels of utility
they give the consumer. Note that preferences are
independent of income and prices.

Util – The arbitrary unit of measure of utility. Basic Properties of Consumer’s Preference

TYPES: 1. Completeness - Consumer is capable of

expressing preferences (or indifference) between
a. Total utility (TU) – the total or sum of all possible bundles.
satisfaction received from consuming a good or 2. More is better - Bundles that have at least as
service per unit of time much of every good and more of some good are
b. Marginal utility (MU) – the extra utility received preferred to other bundles.
from consuming one additional unit of a good 3. Diminishing Marginal Rate of Substitution – The
per unit of time. rate at which a consumer is willing to substitute
∆𝑇𝑈 𝑇𝑈2 −𝑇𝑈1 one good for another and maintain the same
𝑀𝑈 = or 𝑀𝑈 =
∆𝑄 𝑄2 −𝑄1 satisfaction level.
Example: - The amount of good Y the consumer is willing
to give up to maintain the same satisfaction
Q TU MU level decreases as more of good X is acquired.
1 10 10 4. Transitivity - Transitive preferences along with
2 16 6 the more-is-better property imply that:
3 18 2 - The indifference curves will not intersect.
4 18 0 - the consumer will not get caught in a
5 15 -3 perpetual cycle of indecision.

Indifference Curve – A curve that defines the

Law of Diminishing Marginal Utility – all else equal as combinations of two goods that give a consumer the
consumption increases the marginal utility derived from same level of satisfaction.
each additional unit declines.

Cardinal Utility – means that an individual can attach

specific values or numbers of utils from consuming each
quantity of a good or basket of goods. An actual measure
of utility, in util.

Ordinal utility – the rankings of the utility received from

consuming various amounts of a good.

- In short, ordinal utility only ranks various

consumption bundles, whereas cardinal utility
provides an actual index or measure of satisfaction.

Equimarginal Principle – states that consumers will choose

a combination of goods to maximize their total utility. This
 Indifference Curve

Indifference Map – The entire set of indifference curves

reflecting the consumer’s tastes and preferences.

Characteristic of an Indifference Curve:

1. Negatively sloped
2. Cannot Intersect
3. Convex to the origin

Marginal Rate of Substitution (MRS) – the amount of one

good that an individual is willing to give up for an
additional unit of another good while maintaining the
same level of satisfaction or remaining on the same
indifference curve.

- is the absolute value of the slope of an indifference

curve.

Constraints of Consumer Behavior

Budget Constraint – the limitation on the amount of goods

that a consumer can purchase imposed by his or her
limited income and the prices of the goods.

PXQX + PYQY = I

Budget Line – a line showing the various combinations of

two goods that a consumer can purchase by spending all
income.

Budget Set – The bundles of goods a consumer can afford.

Market Rate Of Substitution – The rate at which one good

may be traded for another in the market; slope of the
budget line.