PACIFIC SOUTHBAY COLLEGE, INC.

Purok Carmenville, Calumpang, General Santos City

 

CONSUMER BEHAVIOR
Learning Objectives:
At the end of the lesson, the students shall be able to learn about:
 Utility
 Marginal Utility
 Total Utility
 Maximizing Utility
 Water-Diamond Paradox
 Consumer Surplus
 UTILITY.  We have already learned in the previous study that the emphasis of economics is to
recognize and understand the problem of scarcity.  Underlying to the laws of demand and
supply is the concept of utility which gives explanation on how households and economies
target to achieve optimal satisfaction in dealing with scarcity.
UTILITY is the hypothetical concept rather than a certain measure. It refers to the total
satisfaction received from consuming a good or service.
Utility differs from person to person and time to time.  Thus, it is measured by much a person
is willing to pay in exchange for a good or service in his own perspective.
Example: Suppose that you are strolling over a park and suddenly you had this craving for a chocolate
bar.  You are willing to pay Php75 for a piece and there then comes a store where you can purchase
some. When you buy for that chocolate bar for Php75, you gave that a utility of 75; but when the
store only sells it for  Php70 and you bought it for that price, you gave it a utility of 70.
Consider that you still have some craving and you are willing to pay only for Php40 for the next
chocolate. May be you are wondering why it drop down from Php70. It cutback because the craving is
not as ‘grand’ as the previous one.
 MARGINAL UTILITY . Is the additional satisfaction or amount of utility gained from each extra
unit of consumption although generally, utility increases as more of a good is consumed.
However, in this case, marginal utility decreases with each additional increase in the
consumption of a good. This illustrates the law of diminishing  marginal utility.
Since there is a limit of satisfaction,the consumer will no longer receive the same pleasure
from consumption once that threshold is crossed.  If you eat more chocolate bars, the
pleasure of each additional chocolate bar will be less than the pleasure you received from
eating the one before- probably because you are starting to feel full or you have had too many
sweets for one day.
You gain more satisfaction from each additional unit you consume when you less have it; you
are willing to pay for it because the utility you gain from that product is higher. Prices are
lower at a higher quantity  demanded because your additional satisfaction diminishes as you  
law of diminishing marginal utility.
 TOTAL UTILITY. Is the aggregate sum of satisfaction gained from consuming  a given amount
of  goods. This could be calculated through adding the marginal utilities of all units purchased.
Look at the data given below  as an example.

Example:     
 Chocolate Bars Eaten          :             Marginal Utility          :                    Total Utility
               1                                                      70                                                      70
               2                                                      40                                                    110
               3                                                      10                                                     120
               4                                                      5                                                       125
Hence, the formula would be: Total Utility Satisfaction= MU + TU
Where: MU is the Marginal Utility and TU is the Total Utility.

 MAXIMIZING UTILITY.  Utility Maximization is a hypothesis explaining consumer behavior with

consumer demand theory and utility analysis. Economists assume the consumer is rational
and will thus maximize his or her total utility by purchasing a combination of different  
It makes sense to think that people are generally motivated to do what is best for them, to
purchase the most satisfying goods, to make decisions that do more good than harm, to
improve their overall living standards and well-being, that is, to maximize their utility.   
Thus, instead of spending all of your money on two chocolate bars, which has a total of
php110, you should instead purchase the one chocolate bar, which has a utility value of
php70, and perhaps a glass of milk, which has a utility of php50. This combination will give
you a maximized total utility of Php120 but at the same cost as the two (2) chocolate bars.
 THE WATER-DIAMOND PARADOX. The concept that confuses everyone, is the puzzle ‘why is
water takes a cheaper price than a diamond, will in fact it is more useful?’
This paradox was explained by means of understanding of marginal utility and total utility.
Households are willing to pay a higher price for goods with greater marginal utility.
As we all know, there is an ample amount of water that diamond. As such, water which is
plentiful has enormous total utility, but a low price because of a low marginal utility.
Diamonds, however, have less utility puzzling they are less plentiful, but a high price because
of a high marginal utility(only very few can afford it to acquire).
Personal judgments can show diamonds are more costly  than water because people
subjectively value them more highly.  However, it still cannot explain why diamonds should be
valued more highly than an essential good such as water. In other words, consumers are not
choosing between all of the diamonds in the world versus all of the water in the world.
Undoubtedly, water is more valuable. They are choosing between one additional diamond
versus one additional unit of water. This principle is known as marginal utility.
 CONSUMER-SURPLUS. Is an economic measure of consumer satisfaction or utility. It is
calculated by analyzing the difference between what consumers pay for a good and how much
he/she is willing to pay for that.
Consumers always like to feel like they are getting a good deal on the goods and services.
The consumer-surplus is simply an economic measure of this satisfaction. Consider the first
example given. The chocolate bar cost Php70 but then you are willing to pay for Php75. Thus, as
you purchase that chocolate bar, you gain a php5 consumer -surplus.
Since the consumer-surplus is the difference between what consumers pay for a good and
how much he is willing to pay for that, the consumer –surplus can easily be illustrated in a
demand curve (if we are going to draw a graph) above the specific price line.

SUMMARY:
 UTILITY. Is the total satisfaction received from consuming a good or service. This is essential as
such it is the goal of economics- satisfying consumer wants through efficient allocation of
scarce resources. Thus, it is important to know how much we satisfy them.
 UTILITY MAXIMIZATION  is a hypothesis explaining consumer behavior with consumer
demand theory and utility analysis. Economists assume the consumer is rational and will thus
maximize his or her total utility by purchasing a combination of different products rather than
more of one particular product. Thus, a consumer would not stick on a single product
consuming the highest utility he might have. This matter could be accompanied and explained
through another concept: the WATER-DIAMOND PARADOX.
 

Activity/Assignment:   Do this, following the concept of CONSUMER BEHAVIOR/UTILITY

1. Do the graph of the following :(Product: Burger)

Price
45  ________________________________________
40 ________________________________________
35_________________________________________
30_________________________________________
25_________________________________________
20_________________________________________  
15_________________________________________
10_________________________________________
 5__________________________________________
 0 ______|_______|_______|______|_____________
    0          200            400            600            800   Quantity
Where: At the price of Php45 the utility demanded is only 200.
               At  Php30 utility is 400.
               At  Php 20 utility is 600.
               At Php 10 utility is pegged at 800.
Question: What do you think the product of your graph suggests as you analyze the curve?
2. If John is willing to pay as much as Php30 for a burger, how much surplus would be received if
he pays the market price for a burger? Why?
____________________________________________________________
3. How much total consumer -surplus is received in this market?(Burger product)
 
4. Elaborate in your own understanding/version the Water-Diamond Paradox.