ManEcon Handout – Balingit, Clarence Jane N.

- This shows the behavior of total utility and

marginal utility in graphs which exhibit the
Law of Diminishing Utility
THE THEORY OF CONSUMER BEHAVIOUR - Saturation Point – when total utility
reaches its peak
➢ Consumer Behaviour - Formula: MU= TU
- The study of how individual customers, ——————
groups or organizations select, buy, use, Q
and dispose ideas, goods, and services to
satisfy their needs and wants.
- It refers to the actions of the consumers in
the marketplace and the underlying
motives for those actions. ➢ Law of Diminishing Marginal Utility
- States that as one consumes more and
➢ Factors influencing Consumer Behaviour more of a particular good, additional or
1) Psychological Factors extra satisfaction decreases
2) Social Factors - More of a psychological law
3) Cultural Factors - Forms the basis of a downward sloping
4) Economic Factors demand curve
5) Personal Factors - The less we have of a thing, the more we
want of it
- A person consumes more and more of a
• Utility particular commodity, the marginal utility
- Refers to the degree of satisfaction per unit of the successive units diminishes
of consumption of a good

➢ Cardinal Utility Theory

➢ The Ordinal Utility Theory
- Theory which states that utility is
measurable.
- Utils- the unit of measurement for
satisfaction
• Total Utility and Marginal Utility Curve
- Also called the Indifference Theory
- States that utility is not measurable but can
only be ranked or compared
- In this theory, we assume that people know
what they like, their choice is consistent,
and that they prefer more to less.
- We also recognize that people have
different taste and appetite, what is good
for one may not be good for others and that
taste and preference are relative
- Another thing to recognize is that people
are rational beings
- When a rational consumer makes a choice,
one tries to maximize satisfaction or
minimize expenses
- To maximize utility, one has to choose what
one likes best
 ➢ Consumer Equilibrium

➢ Indifference Curve
- Shows different combinations of two goods
that can be consumed that yield the same
level of satisfaction or utility.
- Indifference map- series of indifference
curve

• Consumer Equilibrium
- Point where the budget line is tangent to
the indifference curve
- Sometimes, people tend to equate quality
of the product to its price (if a good is more
expensive the more it is preferred
compared to a less expensive good)

➢ The Budget Constraint

• Budget line
✓ Utility or satisfaction can only be derived the
- Locus of points that shows indifferent
moment you start using the goods.
combinations of two goods that can be
purchased given the same money income or
budget.
- In constructing a budget line, one has to
determine the price of the good X (Px) and
price of good Y (Py) and the corresponding
budget (B)

Given Px=10, Py=20 and Budget (B)=200. The

combination of good X and good Y that can be
purchased is determined by the equation:

Budget= Px Qx + Py Qy

200= 10 Qx + 20 Qy

• Budget function (like the one given above)

- Mathematical equation showing various
combinations of 2 goods that can be
purchased given the same budget or
income
• Budget Schedule
- List or table that shows various
combinations of two goods that can be
purchased given the same money income