Consumer Choice

and Utility
Maximization
UTILITY
• Defined as the power of goods and services to
satisfy wants.
• It refers to the pleasure or satisfaction
associated with having using consuming or
benefiting from goods or services.
• The quality of the product or service is primarily
responsible for its power to satisfy wants.
Examples of the cause and source of
utility are:
• Security
• Pride
• Power
• Pleasure
• Comfort
• Ease of use
Remember:
• A thing that possesses a want
gratifying quality may not possess
utility if it is not capable of being
used.
•The utility of certain good varies from
person to person
Measuring Utility
• Cardinal Utility approach refers to the
measurement of utility by assigning numerical
values referred to as utils.

• Ordinal Utility measures approach measures utility

in terms of ranks such as indicating levels from most
satisfying to least satisfying, best to worst and
highest to lowest.
The Concept of Total Utility
•It is the aggregate amount of
satisfaction or fulfillment that a
consumer receives through the
consumption of a specific good
or service.
The Concept of Marginal Utility
• The satisfaction an individual receive
from consuming one additional units
of goods or service.
•It is useful in explaining how consumers
make choices to get the most benefit
from their limited budgets.
Schedule of Total and Marginal Utility for
Maria Sunga
Guavas Consumed (In Total Utility (in Marginal Utility
Pieces) utils)
1 50 50
2 80 30
3 100 20
4 110 10
5 90 -20
6 20 -70
Law of Diminishing Marginal Utility

•The Law states that the

amount of extra or marginal
utility declines as a person
consumes more and more of
a goods
The consumer is faced with the
following realities:
1. The varying prices of goods
competing for his attention.
2. The Limited income or
purchasing power he has.
Consumer Equilibrium

•The most preferred

combination of
goods to buy.
Utility Maximization
•It is the concept that
individuals and organizations
seek to attain the highest
level of satisfaction from
their economic decisions.
The Utility of Two Goods
The Utility of Two Goods
Amount of Utility (in utils)
From Ice Cream From Chocolate Bars
Quantity
Total Marginal Total Marginal
Consumed
0 0 0 0 0
1 14 14 9 9
2 22 8 17 8
3 24 2 24 7
4 24 0 27 3
5 21 -3 29 2
6 10 -11 30 1
Schedule of Combinations for Maria
Sunga’s Utility Maximization
Quantity
Combination Ice Cream +Choco Total Price Total utils
Bars
1 1 5 95 43
2 2 4 100 49
3 3 2 90 41
4 4 1 95 33
5 5 0 100 21
6 0 6 90 30
Indifference Analysis
• This means that when the consumer is faced
with a set of alternative bundles of goods he is
able to rank them in all order of preference.
When confronted by any two bundles for
instance he is able to say whether he prefers
one to the other or whether he is indifferent
between them (which means he regards them
as equally desirable or equivalent)
 Indifference Schedule

Mangoes (in
Combination pieces) Guavas (in pieces)

1 12 2
2 10 4
3 8 6
4 6 8
5 4 10
6 2 12
Substitution / Substitute Goods
• Commodities which can be used or
consumed in place of other goods.
• The substitution option is exercised
by the consumer when there are
available goods and service which
yield the same level of satisfaction but
at lower costs.
• If a rise in the price of a good causes
an increase in the demand for another
these two goods qualify as
substitutes.
Types of Substitutes
• Close substitutes - Provides an almost or equal
level of satisfaction as that of the substituted good or
service.
• Weak substitutes - Provides a lower level of
satisfaction than the substituted good or service
The Budget Line
• The line on a diagram
that shows the various
combinations of
commodities that can
be bought with a given
income at a given set
prices.