THEORY OF CONSUMER BEHAVIOR

LEARNING OBJECTIVES:

Explain the concept of utility and the basic assumptions

underlying consumer preferences.
Explain the equilibrium condition for an individual consumer to
be maximizing utility subject to a budget constraint.
Use indifference curves to derive a demand curve for an
individual
consumer.
Identify the substitution, income, and total effects of a change
in the price of a good.
Explain why demand curves are downward sloping.
utility a s s a t i s f a c t i o n

Utility represents a way

to relate the amount of
goods consumed to the
amount of satisfaction
that the consumer gets.
U t i l s = Unit o f S a t i s f a c t i o n

Utility = L e v e l
of
Satisfaction
 UTILITY

ORDINAL CARDINA
L
METHO METHOD
D
 ORDINAL METHOD

- is done w hen an indi v idual ranks the utilit y

for commodit y

CARDINAL METHOD

- is the process in w hich indi v idual gi v e

the intensit y of utils he deri v e in 1 unit of
goods .
 T YP ES OF
UTILITY

TOTAL MARGINA
UTILIT L
Y UTILITY
TOTAL UTILITY
The sum of the total satisfaction from the
consumption of specific goods or
ser v ices . It inc reases as more good s are
c onsumed .

MARGINAL UTILITY
It is the additional satisfaction gained from each
extra unit of consumption.
It d ec reases w ith eac h ad d itional inc rease in
the consumption of a good .
 SATURATION POINT

- is the point w here y our total utilit y cur v e is

on its peak and the marginal utility is equal
to
( z ero ) 0 .
Law o f Diminishing M a r g i n a l
Utility

- When a consumer consumes a particular

commodit y , all the other things being constant ,
the satisfaction deri v ed from the consumption of
each additional unit of that commodit y
decreases .
Indifference Curve

- Is a grap h sho w ing c omb ination

of t w o goods that gi v e the
consumer
equal satisfaction and utility.
Budget Constraints

- Is an ec onomic term referring to the

combined amount of items y ou can
afford
w ithin the amount of income a v ailable to
y ou .
CONSUMER EQUILIBRIUM
- is the point w here budget
line tangent to the
ind ifferenc e c urv e . In real
sense , it is a combination of
goods in w hich the indi v idual
optimi z e his utilit y and
budget .
Mathematicall y , consumer equilibrium can
be e x pressed in terms of :
Where MU x is the
marginal utilit y for
first commodit y ,
MU y is the marginal
utilit y for second
commodit y , P x is
price of first
commodit y and P y is
the price of second
commodit y .
Let us sa y that C y nthia w ants to bu y Pizza and
render Video Rentals . Suppose that she has a
monthl y budget for t w o commodities of
Php 3 . 00 , each pi zz a cost Php 6 . 00 and v ideo
rentals of Php 36 . 00 .
In this case , quantit y 2 - 6 for both commodities satisf y the
condition of consume equilibrium . But to determine w hich
combination she can afford , then y ou need to multipl y the
combination of goods to its price . In this case the point
w here C y nthia w ill consume 4 units of pi zz a and 4 mo v ies
theatre , In computation :

1 = P xX + P y Y
36 = ( Php 6 x 4 ) +
( Php 3 X ) Php 36 . 00 =
Php 36 . 00