Chapter 3 Theory of Consumer Behavior

Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.: Basic Microeconomics-2nd Semester-2020-2021
College College: __BUSINESS EDUCATION

Logo Campus :__Bayombong_____
DEGREE COURSE NO.

PROGRAM
SPECIALIZATION COURSE Basic Microeconomics
TITLE
YEAR LEVEL TIME FRAME Week IM NO.
No.
I. UNIT TITLE/CHAPTER TITLE
Theory of Consumer Behavior
II. LESSON TITLE
III. LESSON OVERVIEW
IV. DESIRED LEARNING OUTCOMES
V. LESSON CONTENT
THEORY OF CONSUMER BEHAVIOR

This chapter revolves around the fundamental concept of utility or satisfaction to explain consumption
and demand behavior in the short-run. Graphs and tables lend support as tools of understanding and analysis. In
addition, the chapter illustrates the simple dynamics of these tools which can serve as a starting point in
understanding long-run consumption behavior.
UTILITY AND BEHAVIORAL FACTORS
Utility is defined as the satisfaction derived from the consumption of a commodity which determines
consumption and demand behavior. As such it is the foundation of consumer behavior.
There are underlying cultural, social, personal, and psychological factors that affect utility and
consumption behavior: Inter-factor combinations filter different patterns of consumption behavior down the line.
Different consumption behaviors can stem from, say, variations with in cultural structure in combination with the
cross-sections of the other interlocking structures.
Cultural Factors
Cultural factors exert the broadest and deepest influence on consumer behavior. Culture is one of the
most fundamental determinants of a person’s wants and behaviors. While lower creatures are largely governed by
instinct; human behavior is largely learned. The child growing up in society learns a basic set of values,
perceptions, preferences, and behaviors through a process of socialization involving the family and other key
institution.
Social Factors
A consumer’s behavior is also influenced by social factors such as the consumer’s preference groups,
family, and social roles and statuses.
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Reference groups are those groups that have a direct or indirect influence on the person’s attitudes or
behaviors. A teenager buys shoes that are in accordance to the taste of his peer groups while a more matured
person would prefer more durable or conservative shoes.
Members of the buyer’s family can exercise a strong influence on the buyer’s behavior. Froom the
parents, a person acquires an orientation towards religion, economics, personal ambition, love. Husband-wife
involvement in purchases varies widely by product category. Husbands are more dominant in the purchases of
insurances and cars; wile wives are more dominant in the purchase of washing machines and kitchen-wares.
A person’s position in each group can be defined in terms of role and status. A role consists of the
activities a person is expected to perform according to the person around him or her. Each role carries status
reflecting the general esteem accorded to it by society.
The kind of clothing that a teacher or a teenager wears reflects their respective roles and statuses. A
company president, for example, will drive a Mercedes Benz, wear expensive clothes, and drink scotch or
whiskey.
Personal Factors
A buyer’s decisions are also influenced by personal outward characteristics such as: the buyer’s age and
life cycle, occupation, economic circumstances, lifestyle, personality, and self-concept.
People change the goods and services they buy over their lifetimes. Young single people have different
consumption needs from retirees; newly-married couples buy different kinds of furniture from older married
couples.
A person’s occupation has an influence on the goods and services he buys. A company president will buy
expensive clothes while a blue-collar worker will buy work clothes.
A person’s lifestyle and economic condition will affect the goods and services bought. The traditionalists
would buy different kinds of goods from those who would like to experiment; the sports minded-type of persons
would prefer different kinds of goods from those who are the stay-home types.
A person’s personality and self-concept will influence his or her buying behavior.
Psychological Factors
A person’s purchases are also influenced by psychological factors: motivation, perception, learning, and
beliefs and attitudes.
Maslow’s Theory of Motivation. Abraham Maslow sought to explain why people are driven by particular
needs at particular times. Malow’s hierarchy of needs are: physiological needs, safety needs, social needs, esteem
needs, and self-actualization needs. A person will try to satisfy the most important needs first. When a person
succeeds in satisfying an important need, it will cease being a motivator for the present time. And the person will
be motivated to satisfy the next most important need.
For example, a starving man (need 1) will not take interest in going to a disco (need 3), nor in breathing
clean air (need 2). However, as each important need is satisfied, the next most important need will come into
play.
A motivated person is ready to act. How the motivated person acts is influenced by his perception and
learning of the situation. Two persons may act quite differently because their perception and learning of a
situation may be different. One buyer may buy one brand of soft drinks while the second buyer buys another
brand.
Perception can be defined as the process by which an individual selects, organizes, and interprets
information to create meaningful picture of the world. Learning, on the other hand, describes changes in an
individual’s behavior arising from experience.
Through perception and leaning, people acquire their beliefs and attitudes. These in turn influence their
buying behavior. If a consumer perceives and believes that Coke is the best softdrink, he or she will buy coke. A
belief is a descriptive thought that a person holds about something; while an attitude describes a person’s enduring
favorable and unfavorable cognitive evaluations, emotional feelings, and action tendencies towards some object
or ideas.
To sum up, a consumer will buy a particular product, given an optimum budget, if he or she thinks and
believes that this product will give him or her the best value or utility.
Useful for understanding the demand side of the market.
Utility - amount of satisfaction derived from the consumption of a commodity ….measurement units Þ utils
Utility concepts
cardinal utility - assumes that we can assign values for utility, (Jevons, Walras, and Marshall). E.g., derive 100 utils from
eating a slice of pizza
ordinal utility approach - does not assign values, instead works with a ranking of preferences. (Pareto, Hicks, Slutsky)
Total utility and marginal utility
Utility is the technical term for satisfaction. There is a functional relationship between utility and
consumption as the need for the latter arises.
Total utility (TU) - the overall level of satisfaction derived from consuming a good or service
Marginal utility (MU) additional satisfaction that an individual derives from consuming an additional unit of a good or
service.
TU
MU 
Q
Total utility and marginal utility

Example (Table 4.1):
• TU, in general, increases with Q
Q TU MU • At some point, TU can start falling
0 0 --- with Q (see Q = 6)
• If TU is increasing, MU > 0
1 20 20
• From Q = 1 onwards, MU is
2 27 7 declining  principle of
3 32 5 diminishing marginal utility  As
more and more of a good are
4 35 3 consumed, the process of
5 35 0 consumption will (at some point)
6 34 -1 yield smaller and smaller
additions to utility
7 36
30 -4
Total Utility Curve

TU
35
Total utility(in utils)
30
25 Figure 4.1
20
15
10
5
Q
0 1 2 3 4 5 6
Quantity
Marginal Utility Curve

MU
Marginal utility (in utils)
20
15
10
5
0 Q
1 2 3 4 5 6
-5
Quantity
Figure 4.2
Consumer Equilibrium
So far, we have assumed that any amount of goods and services are always available for consumption
In reality, consumers face constraints (income and prices):
Limited consumers income or budget
Goods can be obtained at a price
Some simplifying assumptions

Consumer’s objective: to maximize his/her utility subject to income constraint
2 goods (X, Y)
Prices Px, Py are fixed
Consumer’s income (I) is given
Marginal utility per peso Þ additional utility derived from spending the next peso on the good
MU
MU per peso 
P
Consumer Equilibrium
• Optimizing condition:
MU X MU Y

PX PY
• If
MU X MU Y

PX PY
 spend more on good X and less of Y
Simple Illustration
Suppose: X = fishball
Y = siomai
Assume: PX = 2
PY = 10
Numerical Illustration
Qx TUX MUX MUx QY TUY MUY MUy

Px Py
1 30 30 15 1 50 50 5
2 39 9 4.5 2 105 55 5.5
3 45 6 3 3 148 43 4.3
4 50 5 2.5 4 178 30 3
5 54 4 2 5 198 20 2
6 56 2 1 6 213 15 1.5
2 potential optimum positions
Combination A: ® X = 3 and Y = 4
TU = TUX + TUY = 45 + 178 = 223
Combination B: ® X = 5 and Y = 5
TU = TUX + TUY = 54 + 198 = 252
Presence of 2 potential equilibrium positions suggests that we need to consider income. To do so let us examine how
much each consumer spends for each combination.
Expenditure per combination
Total expenditure = PX X + PY Y
Combination A: 3(2) + 4(10) = 46
Combination B: 5(2) + 5(10) = 60
Scenarios:
If consumer’s income = 46, then the optimum is given by combination A. .…Combination B is not affordable
If the consumer’s income = 60, then the optimum is given by Combination B….Combination A is affordable but it yields
a lower level of utility
Indifference Curve Analysis

Indifference Curve (IC) –locus of points, each point representing a bundle of tow commodities, say X and Y,
from which a consumer derives the same level of satisfaction of utility.
The indifference curve together with the isocost is a useful tool for analyzing consumption behavior on
the utility theory. An indifference curve contains varying combination in the consumption of commodities that
yield the same level of total utility.
Indifference Curve Map (IC-Map) – a set of indifference curves indicating increasing utility levels as one
moves in a northeast direction on the X-Y plane.
Graphical Presentation
Y Y
X X
Indifference curve Indifference Map
Characteristics of ICs
An Ic which lies above and to the right of another represents preferred combinations of commodities.
ICs are negatively sloped
ICs never intersect
ICs are convex to the origin
VI. LEARNING ACTIVITIES
VII. ASSIGNMENT
Choose the letter of the correct answer.
_____ 1. ___ can also cause an upward shift in the budget line.
a. Higher prices
b. Higher indifference curve
c. Higher utility
d. Lower prices
_____ 2. The rate of substitution alo9ng the indifference curve implies _____.
a. Utility trade-off
b. Commodity trade-off
c. Relative prices
d. Relative utility of commodities
_____ 3. Another indifference curve corresponds to another level of satisfaction because of the change in _____.
a. Budget
b. Prices
c. Consumption level
d. Utility
_____ 4. The maximum satisfaction point of a budget line is where it is tangent to an indifference curve because _____.
a. Higher indifference curve yields more satisfaction
b. Budget can only buy the satisfaction of the indifference curve within it.
c. The highest indifference curve within a budget line is that which is tangent to it.
d. All of the above
_____ 5. Deviation from the quasi-marginal condition results in less satisfaction because of _____.
a. Relative prices
b. Commodity trade-off
c. Relative utility of commodities
d. Utility trade-off
_____ 6. Substitution effect results from a _____.

a. Change in marginal utility
b. Change in relative marginal utility
c. Decrease in the marginal utility of one commodity
d. Change in total satisfaction
_____ 7. There is consumer surplus when one _____.

a. Pays less for succeeding consumption
b. Pays less for preceding consumption
c. Pays more for succeeding consumption
d. None of the above
_____ 8. Water is cheaper than diamond because of _____.

a. Need
b. Utility in use
c. Utility in exchange
d. Purchasing power
_____ 9. The marginal rate of substitution of Product A for Product B is ____ when there is more preference for the
farmer.
a. Higher
b. Unchanged
c. Varied
d. Lower
_____ 10. The budget line _____ when incomes increase.

a. Shifts upward
b. Shifts downward
c. Does not change
d. Varies
Identify what is being described

_____ 1. Change in overall consumption due to a change in price.
_____ 2. Change in consumption mix due to a change in price.
_____ 3. Equality in the marginal utilities of a commodity item.
_____ 4. One factor that changes the consumption mix favors the commodity over another.
_____ 5. Causes total satisfaction to change.
_____ 6. It is the basis of consumption and demand behavior.
_____ 7. The proponent of Theory of Motivation, which explains the psychological factors that affect consumer behavior.
_____ 8.the psychological law that is based on subjective valuation of satisfaction.
_____ 9. Term in economics for satisfaction.
_____ 10. It depicts the combination that does nor yield any difference in satisfaction.
_____ 11. Social group that has a direct or indirect influence on one’s consumer behavior.
_____ 12. Complete description of an indifference curve’s shape.
_____ 13. The relationship of these two graphical illustrations tells the best combination in the consumption of times
following a limited budget.
_____ 14. What MRS stands for.
_____ 15. The potential consumption of a certain tem on its market price and the income of its buyers.
_____ 16. Principles behind a consumer finding a consumption mix that will garner him the highest level of satisfaction.
_____ 17. Formula for marginal utility.
_____ 18. It is the function of the units of consumption.
_____ 19. The set of activities a person is expected to perform.
_____ 20.it is the function of the units of consumption.
VIII. EVALUATION (Note: Not to be included in the student’s copy of the IM)
IX. REFERENCES
Catelo, Ma. Angeles O (1999). Economics 102 Reference Workbook. Department of economics, UP Los Banos.
Pagoso, C. et. al. (2014). Introductory Microeconomics. Rex Book Store
Silon, T. et.al. (2009). Manual for Economics
Numbering the IM No.: IM-CCCCCC-SSSSSS-NNNN-NNNN
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Semester
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e.g.:
IM-COURSE NO-SEMESTER-SCHOOL YEAR

IM-MCB180-1STSEM-2020-2021

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Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

College College: __BUSINESS EDUCATION

DEGREE COURSE NO.

I. UNIT TITLE/CHAPTER TITLE

Theory of Consumer Behavior

II. LESSON TITLE

III. LESSON OVERVIEW

IV. DESIRED LEARNING OUTCOMES

THEORY OF CONSUMER BEHAVIOR

Total utility and marginal utility

Total Utility Curve

Marginal Utility Curve

Some simplifying assumptions

Qx TUX MUX MUx QY TUY MUY MUy

2 potential optimum positions

Indifference Curve Analysis

ICs are convex to the origin

VI. LEARNING ACTIVITIES

_____ 6. Substitution effect results from a _____.

_____ 7. There is consumer surplus when one _____.

_____ 8. Water is cheaper than diamond because of _____.

_____ 10. The budget line _____ when incomes increase.

Identify what is being described

Numbering the IM No.: IM-CCCCCC-SSSSSS-NNNN-NNNN

IM-COURSE NO-SEMESTER-SCHOOL YEAR

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_ 6. Substitution effect results from a _.

_ 7. There is consumer surplus when one _.

_ 8. Water is cheaper than diamond because of _.

_ 10. The budget line _ when incomes increase.