Chapter 4: Theory of Consumer Behavior

Introduction

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's behavior.

Figure 26 presents the 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 (see
arrows). Different consumption behaviors can stem from, say, variations within the cultural structure in combination
with the cross-sections of the other interlocking structures. In addition, the psychological factors reflect Maslow's
hierarchy of needs as influenced by said interfactor combinations.

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 institutions.

Some people, for example, would go for the music of Bach or Mozart while others would go crazy for Gary
Valenciano; toilet paper may be a common thing for the urban dwellers but could be an unusual thing for the
mountain people.

Most human societies exhibit social stratification. More frequently, stratification takes the form of social
classes. Social classes show distinct product and brand preferences.

Komiks tend to be the reading materials for the lower income classes while magazines and newspapers are
preferred by the middle and higher income classes.

Values of individuals or peoples are highly influenced by the cultural environment. An American or a Western
child is exposed to the values of achievement and success, progress, material comfort, efficiency, and practicality. A
Filipino child, on the other hand, is exposed to the values of hiya, pakikisama, social acceptance, and smooth
interpersonal relationships.

Social Factors

A consumer's behavior is also influenced by social factors such as the consumer's reference groups, family,
and social roles and statuses.

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 group 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. From the parents, a
person acquires an orientation toward religion, economics, personal ambitions, love. Husband-wife involvement in
purchases varies widely by product category. Husbands are more dominant in the purchases of insurances and
cars; while wives are more dominant in the purchases 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 a 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 sportsminded-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, Maslow'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 an interegt 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 people 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 learning, people acquire their beliefs and attitudes. These in turn influence their buying
behavior If a consumer perceives and believes that Coke is the best soft drink, he or she will buy Coke. A belief is a
descriptive thought that a son holds about something, while an attitude a person's enduring favorable and
unfavorable cognitive evaluations, emotional feelings, and action tendencies toward 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.

The Utility Function

 Utility is the technical term for satisfaction. There is a functional relationship between utility and consumption as
the need for the latter arises.

This functional relationship assumes two (2) forms and is quantitatively defined as follows:

TU (Total Utility) = Function of Q

(Consumption)

MU= Δ(TU) (Satisfaction from an additional unit of consumption)

Figure 28 and Table 10 illustrate the aforementioned concepts with the consumption of water as an example.
The symbol for change carries u positive sign when the variable increases and a negative sign if the variable
decreases. As the consumption level increases, a positive marginal utility (MU) increases total utility (TU), while the
opposite is true when MU is negative. Moreover, marginal utility is also defined as the utility or dissatisfaction from
the last unit of consumption, depending on whether MU carries a positive or negative sign. For example, the table
shows that marginal utility (MU) is 2 which is the increase in total utility (TU) when consumption increases from 5 to
6 units. This level of MU is simply the utility of the 6th or last unit of consumption.

But how does the behavior of the MU curve influence the behavior of the total utility (TU) curve and the level of
maximum satisfaction? Referring again to Figure 28 and Table 10 an additional unit of consumption registers a
positive change and, therefore, an increase in total utility (TU) so long as MU is positive. Eventually, the TU curve
registers a negative change and therefore, a decline where MU is negative. The consumer is only willing to
consume up to the point of maximum satisfaction from where an additional unit of consumption no longer yields
additional satisfaction. Beyond this point, the additional dissatisfaction (negative MU) that the consumer begins to
incur simply decreases total utility (TU) or satisfaction.

Stating the concepts in concrete terms, the first glass of water is more satisfying than the second, although, two
glasses of water are more satisfying than one. One is willing to consume more glasses of water so long as one
gains additional and therefore, more satisfaction, but only up to the point where an additional glass is no longer
satisfying. Beyond this point, an additional glass of water becomes more and more dissatisfying leading to a lower
level of satisfaction from all the glasses of water consumed.

But consumers behave differently with the same consumption of a good due to the varying influence of cultural,
social, personal, and psychological factors. Consumers who are very difficult to please would have their total utility
(TU) curve sharply skewed to the right (facing the graph) if we reconstructed Figure 28. It takes more of additionally
less satisfying units of consumption (Marginal Utility or MU) to add up and maximize satisfaction (Point GM). In
contrast, consumers who are very easy to please would have their TU curve sharply skewed to the left as it only
takes less of additionally more satisfying consumption units to multiply satisfaction to the fullest.

In conclusion, the diminishing marginal utility (MU) causes the total utility (TU) to decline eventually, for which
reason maximum consumption is only up to the point of maximum utility.
Consumption

The Indifference Curve

 The indifference curve together with the isocost in the next section 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. An indifference curve illustrates this property assuming two commodity items,
which are shown in Figure 29 and Table 11, are food and clothing.

The points along the indifference curve correspond to the different combinations of consumption of food and
clothing that yield the same level of their aggregate utility. Between any point to another along the curve, an inverse
relationship exists between the commodity units inasmuch as the utility foregone by consuming less of one is
regained 'by consuming more of the other. It is the equality between utility gained and utility foregone that holds the
total utility level from both commodity items constant.

Between any two points along the indifference curve, the ratio between utility gained and utility foregone is
always equal to 1 and, therefore, constant. However, this is not true of the corresponding substitution between the
commodity items. The marginal rate of substitution (MRS) of food (Y-axis) to clothing (X-axis) in Table 11 is
measured as follows which is simply how much food one has to give up to consume an additional unit of clothing.

MRS = Δ Food Consumption

Δ Clothing Consumption

Where:

Δ = change

Assume a continuous increase in clothing consumption and, therefore, a decrease in food consumption. The
marginal utility

(MU) of clothing ( Δ util )

Δ consumption

decreases while its marginal consumption or reciprocal

( Δ consumption )

Δ util

Increases due to the law of diminishing returns. On the other hand, the
marginal utility (MU)) of food consumption increases while the reciprocal decreases due to the opposite influence of
this law as consumption declines. Therefore, for every unit of utility foregone and then regained by continuously
decreasing food consumption and increasing clothing consumption, respectively, the following relationship should
hold true:

positive (Δclothing consumption is increasing)

negative (Δfood consumption is decreasing)

Therefore:

(MRS) = ( Δ Food ) (decreasing)

(Δ Clothing)

Figure 29 and Table 11 illustrate the foregoing relationship through the slope of the indifference curve. The
change in food consumption diminishes for every additional unit of clothing consumed.

The Law of Diminishing Marginal Utility and the Shape of the Curve

Technically, the shape of the indifference curve is convex to the graph's point of origin due to the Law of
Diminishing Returns. To maintain overall satisfaction, one only has to give up less of a good with an increasing
marginal utility (MU) to be regained by more consumption of another with a decreasing MU. But practically put, one
becomes increasingly reluctant to give up a good (food for example) that becomes scarcer and additionally more
valuable (higher marginal utility or MU, in exchange for another (clothing) that becomes more abundant and
additionally less satisfying.
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SUBJECT :ECO
Grading Period:Midterm Created at : 2020-10-01 11:33:54

Lesson Schedule

Lesson Schedule 1 :Oct 01, 2020

Lesson Discussion

Author: Richard Obina | Created at: Thursday, Oct 01, 2020 12:56:03 view 12 replies

Good day Guys!

For Table 10 the Utility schedules, all you have to do to get the Total Utility, first you are going to
add first the first and second line , 6+7=13, then for the 3rd line, add the 1st, 2nd and the 3rd line
6+7+8=18. So to continue to get the 4th line, just add 1st, 2nd, 3rd, and 4th, same with the the
5th up to 7th line.

So, for the 8th line it has been the reversed way if you could check it is decreasing part then the
Total Utility is 28 then on the 9th level of Total Utility should be less 1 or 28-1=27 and so on.

Author: Richard Obina | Created at: Thursday, Oct 01, 2020 12:43:33 click to reply
Then for Table 11, this is what you are going to do:

(MRS) = ( Δ Food )
(Δ Clothing)

Example: MRS =

= 56-46

1-2

= 10/-1

= -10
The answer is -10 and then that would fall under the second line since we could not do the first
one since there is nothing to deduct on its first line so that is why first line has no answer. all you
have to do is put underline on it.

The rest would also fall on negative numbers, and the results, you can see on Fig. 29 since it falls
under negative numbers.