CONSUMER BEHAVIOR
contemporary and close friend of Bentham.
Marginal Utility Approach
• Consumer equilibrium
Curve Approach
• Indifference curve
• Budget line
IMPORTANT TERMS:
1. Needs
- have to be satisfied for an
individual to live.
2. Wants
- Have to be satisfied in order to live
comfortably.
3. Marginal Utility
- Means the additional satisfaction or
utility one gets from consuming an
additional unit of a good.
4. Utils
- Unit of measure to quantify utility
or satisfaction.
5. Law of Diminishing Marginal Utility
- Asserts that as more and more of a
commodity is concerned, his
additional utility from every unit
consumed tend to become less and
less.
HISTORY ON THE DEVELOPMENT OF
CONSUMER DEMAND THEORY
Jeremy Bentham
o First major advance in the development of
consumer demand theory was provided by
Jeremy Bentham in the late 1700’s.
o Coined the term “utility” in reference in the
satisfaction of wants and needs.
o Develop the notion that people are
motivated by the desire to maximize utility.
Bentham firmly believed that utility was
measurable quantifiable characteristic
of a person, much like height or weight.
John Stuart Mill
o Theoretical work develop by Bentham was
extended and popularized by John Stuart
Mill, whose father James Mill was a
o The elder Mill introduced the younger Mill
to the thoughts and teaching of Bentham at
an early age.
o He expanded and promoted these
consumer demand principles in a number
of publication and including his book,
Principles of Political Economic, which was
the dominate economics text book for
several decades.
William Stanley Jevons
o He provided a major improvement in
consumer demand theory with the notion of
marginal utility.
o Developed the rule of consumer
equilibrium, stating that consumers
purchase goods such that the ratio of
marginal utilities is equal to the ratio of
prices.
o Also helped to transform consumer
demand theory (as well as microeconomics
in general) into a rigorous mathematical
science.
CONCEPT OF UTILITY
Utility
- The power of goods and services to satisfy
wants. Refers to the pleasure of
satisfaction.
- Using, consuming, benefitting from goods
and services.
- Quality of the product or services primarily
responsible to satisfy wants.
Measuring utility
- Pleasure or satisfaction derived from using
a product is psychological thus incapable
of measurement in absolute terms.
- However, economist hurdle this problem
and proposed two ways of measuring
utility.
Cardinal Utility
- Refers to the measurement of utility by
assigning numerical values, referred to
as UTILS such as: 1 utils, 12 utils, 140
utils, 100 utils…
 Ordinal Utility
- Measures utility in terms of ranks: best
to worst, highest to lowest.
TOTAL UTILITY
- Total satisfaction obtained from all units of
a particular commodity consumed over a
period of time.
- Sum of marginal utilities of each
successive unit of consumption.
MARGINAL UTILITY
- Change in the total utility that results from
unit one that may change in consumption
of the commodity within a given period of
time.
- Differences between total utility derived
from one level of consumption and total
utility derived from another level of
consumption.
- Marginal Utility is an important concept
because economists use it to determine
how much of an item a consumer will buy.
THE LAW OF DIMINISHING MARGINAL UTILITY
SCHEDULE OF TOTAL AND MARGINAL
UTILITY
RELATIONSHIPI BETWEEN TOTAL UTILITY
AND MARGINAL UTILITY
BUDGET LINE
- Line showing the alternative combination of
any two goods that a consumer can afford
at given prices for the goods and a given
level of income.
INDIFFERENCE CURVE
- Curve on a graph (axes of which represent
quantities of two commodities) linking
those combinations of quantities that the
consumer regards as of equal value.
PROPERTIES OF INDIFFERENCE CURVE
1. Negatively Sloped
2. Higher indifference curve represents higher
level of satisfaction
3. Indifference curve are convex to the origin
4. Indifference curve cannot interest each
other
BUDGET CONSTRAINT
- Limit to expenditure imposed by a cash-
limited budget
- Shows the limiting boundary of
combinations of purchases that are
possible with that budget.

OPTIMUM COMBINATION
- The highest indifference curve that touches
the budget line at a point of tangency.
CONSUMER SOVEREINTY
- Economic philosophy that suggests
consumer demand drives business in free
enterprise systems – systems in which
companies typically have the right to enter
an industry and compete fairly.
CONSUMER SURPLUS
- Extra satisfaction received from purchasing
a good
- To express the difference between how
much a consumer paid for a good/service
and how much extra he would have been
willing to pay for that good/service.
PRODUCTION THEORY
SHORT RUN
- Quantity of some inputs (fixed factors)
cannot be increased.
LONG RUN
- All inputs may be varied in which the basic
technology of production cannot be
changed.
TOTAL PRODUCT
- Total amount that is produced during a
given period of time.
AVERAGE PRODUCT (AP)
- Total product divided by the number of
units of the variable factor used to produce
it.
MARGINAL PRODUCT (MP)
- Change in total product resulting from the
use of one additional unit of variable
factor.
LAW OF DIMINISHING MARGINAL
PRODUCTIVITY
➢ When successive units of a variable input
worked with a fixed input beyond certain
point the additional product produced by
each additional unit of variable, decreases.
➢ Message: proper combination of a variable
input and a fixed input in order to attain the
maximum output. It is not advisable to keep
on increasing the number of farmers to
work. If they are many, most of them have
nothing to do. They only hamper the work
of others.
3 STAGES OF PRODUCTION
 LAW OF DIMINISHING RETURNS
➢ Non-fixed factor is added or increased,
output ceases to increase and may even
begin to decrease. At this point where
decreases in output (i.e., marginal product)
begin, the law of diminishing returns.
➢ Marginal product of labor starts to fall
➢ This is the stage that all companies strive
for. Somewhere at the peak of this stage is
the exact ideal spot where companies
should operate, where marginal product
and average product intersect, meaning
that a business will be able to optimize its
output. Economists say this is the stage in
which “rational” firms should operate.

COST OF PRODUCTION
- Expenses faced by a business when
producing goods/services for a market.
FIXED COSTS
- Expenses that do not change in
proportion to the activity of a business.
- Include: overheads (rent, insurance-
premium, interests, depreciation, new
equipment, marketing and advertising),
and also direct costs such as payroll
(particularly salaries).
- DOES NOT CHANGE WITH THE
VOLUME OF PRODUCTION

VARIABLE COSTS
- Change in direct proportion to the
activity of a business such as sales or
production volume.
- COST OF GOODS