CHAPTER 4

CONSUMER BEHAVIOR AND

UTILITY MAXIMIZATION
CONSUMER
A consumer is one who demands and consumes goods
and services.
Determine what are to be produced since we are the
ultimate purchasers of goods and services
GOODS AND SERVICES
Goods refer to anything that provides satisfaction to
the needs, wants and desires of the consumer.
Services in the other hand, are any intangible
economic activities, that likewise contribute directly or
indirectly to the satisfaction of human wants.
CONSUMER GOODS
These are the goods that yield satisfaction directly to
any consumer
These goods are primarily sold for consumption, and
not for further processing or as an input or raw
material needed in producing another good
ESSENTIAL OR NECESSITY GOODS VS
LUXURY GOODS

ESSENTIAL OR NECESSITY GOODS

Essential or necessity goods are goods that satisfy the
basic needs of man
These are goods that are necessary in our daily
existence as human
ESSENTIAL OR NECESSITY GOODS VS
LUXURY GOODS

LUXURY GOODS
Luxury goods are those which men may do without
used to contribute to his comfort and well being
ECONOMIC AND FREE GOODS
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
it to use. If a good is so abundant that there is enough
of it to satisfy everyone’s needs without anybody
paying for it, that good is free
TASTES AND PREFERENCES
Tastes and preferences are determined by age, income,
education, gender, occupation, customs and traditions
as well as culture.
Preferences are choices made by us consumers as to
watch products and services to consume. The strength
of our preferences will determine which products to
buy given our limited disposable income and thus the
demand of products as well as which products to buy.
MASLOW’S HIERARCHY OF NEEDS
Identifies the basic priorities of every consumer
THE ECONOMIC SATISFACTION
You might be wondering by now how economics can
explain the behavior of consumers in order to attain
maximum level of satisfaction on the goods and
services that they generally consume
In this section we try to explain how consumers attain
maximum satisfaction level on the many goods and
services available to them for consumption
THE UTILITY THEORY
Refers to the satisfaction or pleasure that an individual
or consumer gets from the consumption of a good or
service that (s)he purchases
Measured by how much a consumer is willing to pay
for a good or service
THE UTILITY THEORY
Hypothetical Demand Schedule for Siopao
PRICE (P) QUANTITY DEMAND (

15.00 1

12.75 2

10.50 3

8.24 4

Table 4.1
THE UTILITY THEORY
Marginal Utility
 defined as the additional satisfaction that an
individual derives from consuming an extra unit
of a good or service
 Marginal utility of a commodity is the increase in
total utility or satisfaction derived from the
consumption is the increase in total utility or
satisfaction
THE UTILITY THEORY
Total Utility
 Total benefit that a person gets from the
consumption of a good or service
 Depends on the quantity of the good consumed
- more consumption generally gives more total
utility
 Hypothetical Utility Schedule for Siopao

Unit Purchased Total Utility Marginal Utility

1 40 40

2 90 50

3 170 80

4 270 90

5 350 80

Table 4.2
MATHEMATICAL DERIVATION OF
MARGINAL UTILITY
Marginal utility is simply the change in total utility
divided by the change in quantity:

Expanded formula for marginal utility:

•

 Where: new total utility new quantity consumed

original utility original utility consumed
GRAPHICAL ILLUSTRATION OF TU AND
MU
Total Utility Curve

11
10

1 2 3
Figure 4.1
GRAPHICAL ILLUSTRATION OF TU AND
MU
Marginal Utility Curve

MU

MU
Q
Figure 4.2
MAXIMIZING TOTAL UTILITY
Quantifies the added satisfaction that a consumer
garners from consuming additional units of goods and
services
The concept of marginal utility is used by economics
to determine how much of an item consumers are
willing to purchase
CONSUMER SURPLUS
Is a measure of the welfare we gain from the
consumption of goods and services, or a measure of
the benefits that we derive from the exchange of goods
Difference between the total amount that we are
willing and able to pay for a good or service and the
total amount that we actually pay for that good or
service
CONSUMER SURPLUS
P

3,000
consumer surplus

2,500

Q
Figure 4.3
THE INDIFFERENCE CURVE
Is a line that shows combination of goods among
which a consumer is indifferent
In microeconomic theory, it is a graph showing
different combination of bundles of goods, each
measured as to quantity, between which a consumer is
indifferent
THE INDIFFERENCE CURVE
Hypothetical Table for Consumption of Meat and Fish
Combination Meat(kg) Price of Meat (P) Fish(kg) Price of Fish (P)

A 5 500 1 100

B 4 400 2 200

C 3 300 3 300

D 2 200 4 400

E 1 100 5 500

Table 4.3
Indifference Curve
Hamburger

Preferred
4 a b

Indifference
2 Curve
c Not
preferred Pizza
2 4 6

Figure 4.4
MARGINAL RATE OF SUBSTITUTION
(MRS)
The concept of the marginal rate of substitution is the
key to ‘reading’ a preference map
Rate at which a person will give up good y (the good
measured on the y-axis) to get more good of x (the
good measures on x-axis)
BUDGET LINE
A budget or consumption-possibility line shows the
various combinations of two products that can be
purchased by consumer with his income, given the
prices of the products
A consumer, given fixed budget, must spend wisely
and efficiently in order to maximize his satisfaction
 Hypothetical Table for Budget Line

Unit-A (Beans in kg) Price-A Unit-B (Onions in kg) Price-B Budget

5 P 125 1 P 25 P 150

4 100 2 50 150

3 75 3 75 150

2 50 4 100 150

1 25 5 125 150

Table 4.5
Budget Line
BEANS

Figure 4.5 ONIONS

PURPOSE OF A BUDGET
The purpose of a budget is to not spend more than
what you have. It tracks the incoming and outgoing
monies. Individuals, households, business, and even
government use budgets so that they have at least a
small amount of money left (savings) at the end of the
month for a movie with the kids or dividends for the
investors.
Any Question?