Chapter V

Consumer Behavior
I. Introduction
Consumer make choices as frequent as wants are felt. Should a person should
eat breakfast or not? Play at the computer shop or attend classes? These are examples
of choices that a consumer makes choices and it is important consideration in the study
of consumer behavior.

II. Intended Learning Outcomes

1. Explain the basic concepts of utility

2. Distinguish total utility from marginal utility
3. Differentiate indifference curve from a budget line
4. Describe the purpose of the budget line

III. Learning Topic Contents

Definitions

Consumption – direct utilization or usage of the available goods and

services by the buyer of consumer sector. It is also the satisfaction obtained by
the consumers for the use of goods and services.

Consumer –is the one who demands for goods and services.

Consumer behavior – the study of individuals or groups and the process

consumers use to select, secure, use, and dispose of products and services, to
satisfy needs.

Maslow’s Hierarchy of Needs –it identifies the basic priorities of every

consumer. Maslow saw human needs in the form of a hierarchy, ascending
from the lowest to the highest. The basic human need placed by Maslow is an
ascending order of importance like a pyramid. These are physiological needs,
security or safety needs, social needs, esteem needs, and self-actualization.
The Economics of satisfaction

Utility Theory – Utility, in economics, refers to the satisfaction or pleasure

that an individual or consumer gets from the consumption of a good or
service that he or she purchases. For purposes of economic analysis, utility
is also measured by how much a consumer is willing to pay for particular goods or
services.

Table 3: Hypothetical Demand Schedule for Siopao

Price (P) Quantity Demanded

15.00 1
12.75 2
10.50 3
8.25 4

The above table reflects the amount of money that you are willing to buy for an
additional unit of siopao declines. What is the reason for this? As you may have
experienced the more siopao you eat, the more you became satiated so that you are
not willing to spend more for the next siopao that you wish to consume. In other
words, the satisfaction or utility that you derive in the consumption of an additional
siopao declines as you consume more and more for it.

The pleasure or satisfaction derived from using a product or service is

psychological and thus, is incapable of measurement in absolute terms. In
this regard, economists have proposed two ways of measuring utility:

1) the cardinal utility approach

2) the ordinal utility approach

The cardinal utility approach refers to the measurement of utility by assigning

numerical values, referred to as utils, such as util, 2 utils , etc.

The ordinal utility approach measures utility in terms of ranks, indicating levels
from most satisfying to least satisfying.
 Marginal Utility – Is defined as the additional satisfaction that an individual
derives from consuming an extra unit of a good or service. Marginal means
“additional” or “extra”.

Total Utility – is the total satisfaction that a consumer derives from the
consumption of a given quantity of a good or service in a particular time or
service.

Table 4: Hypothetical Utility Schedule for Siopao

Unit purchased Total utility Marginal Utility

1 40 40
2 90 50
3 170 80
4 270 100
5 350 80

Marginal Utility Formula:

change in total utility

=
change in quantity consumed

Where:

TU2 – TU1
a. =
Q2 - Q 1
 TU2 = new total utiity
TU1 = original utility
Q2 = new quantity consumed
Q1 = original quantity consumed

Consumer Surplus

Specifically, consumer surplus is the difference between the total amount that we
are willing and able to pay for a good or service and the total amount that we actually
pay for that good and service. Generally, it is measures of the welfare we gain from the
consumption of goods and services or a measure of the benefits derive from the
exchange of goods.

Consumer surplus

3,000

2,500

Figure 7
Indifference Analysis
Another technique used in the analysis of consumer demand is based on the
notion of ordinal utility. This means that when the consumer is faced with a set of
alternative “bundles” of goods, he is able to rank them all in order of preference. When
confronted by any two bundles, for instance, he is able to say whether he prefers one to
the other, or whether he is able to say whether he prefers one to the other, or whether
he is indifferent between them.

Table 5: Indifference schedule

Combination Mangoes Guavas

 1 12 2
2 10 4
3 8 6
4 6 8
5 4 10
6 2 12

The difference curve is a line that shows combinations of goods among which a
consumer is indifferent.

Substitution- the substitution option is exercised by the consumer when there are
available goods and services which yields the same level o satisfaction but at lower
costs.

Types of Substitutes

1. Close substitutes – provides an almost or equal level of satisfaction as that of

the substituted good or service,
2. Weak substitutes – provides a lower level of satisfaction than the substituted
good or service.

Budget line

The budget line is a useful tool in determining the combinations of goods and
services that will satisfy the consumer with a limited income or budget to spare.

Engel Curve or Engel’s Law

 Engel curve illustrate the relationship between consumer demand and
household income. This curve is named after Ernest Engel, a German statistician who
studied the spending patterns of groups of people of different income. According to
Engel, as the income of a family increases, the proportion of its income spent on
necessities, such as food, declines, while the income spent on luxury goods increases.

For families that have low income, a bigger proportion of their income is spent on
necessities, while those who are rich, relatively spend a large part of their income on
luxury goods.

IV. Self-learning Activities

1. What is the meaning of the term utility?

2. How is utility measured? Why is measuring utility an important exercise?
3. Distinguish total utility from marginal utility.
4. What is an indifference curve and budget line?
5. What is the purpose of the budget line?

V. REFERENCES

Avila-Bato, Malveda,&Viray (2016). Microeconomics:Simplified (2016). Anvil Publishing,

Inc. Mandaluyong City, Philippines

Marcelino, Viray, Avila-Bat0.& Bautista (2010), Principles of Economics with Taxation

and Agrarian Reform .National Bookstore, Mandaluyong City, Philippines
Costales,A, et. Al (2000). Economics: Principles and applications. JMC Press Inc.
Quezon City

Fajardo, F. (1997).Microeconmics. Rex Bookstore company, Manila,Philippines

Fajardo, F. (2001).Agricultural Economics. 4th edition, Rex Bookstore Inc. Sampaloc,

Manila
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q=types+of+demand+elasticity++.image&qpvt=types+of+demand+e on April 28, 2018
Types of supply elasticity .Retrieved from https://www.bing.com/images/search?
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GRE on April 28, 2018.