CONSUMER BEHAVIOR

AND UTILITY
MAXIMIZATION
CONSUMER

A consumer is one who demands goods and services.

GOOD and SERVICES

Goods refer to anything that provides satisfaction to the needs,wants and

desires of the consumer.
CONSUMER GOODS

These are the goods that yield satisfaction directly to any consumer.
These goods are primarily sold for consumption, and not to be used for
further processing or as an input/raw material needed in producing
another good.
ESSENTIAL or NECESSITY GOODS vs.
LUXURY GOODS

Essential or necessity goods are goods that satisfy the basic needs of man.
LUXURY GOODS

Luxury goods are those which men may do without, but which are used to
contribute to his comfort and well being.
ECONOMIC and FREE GOOD

An economic good is that which is both useful and scarce. It has value
attached to it and a price has to be paid for its use.
TASTES and PREFERENCES

Consumer have various tastes and preferences. Generally, tastes and

preferences are determined by age, income, education, gender,
occupation, customs and traditions as well as culture.
Preferences are the choices made by us consumer as to which products
or services to consumer.
UTILITY THEORY

Utility, In economics, refers to the satisfaction or pleasure that an individual

or consumer gets form the consumption of a good or service that she or
he purchase.
Hypothetical Demand Schedule for
Chocolate Bars
MARGINAL UTILITY

Is defined as the additional satisfaction that an individual derives form

derives form consuming an extra unit of a good or services.
Marginal means additional or extra
TOTAL UTILITY

Total utility, on the other hand is the total satisfaction that a consumer
derives form the consumption of a given quantity of a good or service in a
particular time period.
MATHEMATICAL DERIVATION OF
MARGINAL UTILITY

How do we derive marginal utility? Marginal utility is simply change in total

utility divided by the change in quantity. Thus

MU = TU
Q
MATHEMATICAL DERIVATION OF
MARGINAL UTILITY

MU = TU2 TU1
Q2 Q2
where: TU2 = the new total utility
TU1 = the original utility
Q2 = the new quantity consumed
Q1 = the orginal quantity consumed
Graphical illustration of total utility and
marginal utility
Graphical illustration of total utility and
marginal utility
LAW OF DIMINISHING MARGINAL
UTILITY TOTAL UTILITY CURVE.
MARGINAL UTILITY CURVE
CONSUMER SURPLUS

We have already encountered the term surplus in our discussion of price

equilibrium in the previous chapter
CONSUMER SURPLUS