Consumer Behavior

Choice and Utility

Consumer Behavior - people tend to choose those goods and services
they tend to value greatly.
Utility
- SATISFACTION from consuming goods/services
Was develop to describe the way consumers choose among different
consumption possibilities.
Means how consumers rank different goods and services.
Scientific construct that economies used to understand how consumers
divide their limited resources among commodities that provide them
with satisfaction
- Taste or preference and/or income affects the decision on what bundle
to consume
* Taste depends on personality
* Preference Which goods provide satisfaction & how much satisfaction
* Income what bundle of goods

Marginal Utility and Law of

Diminishing Marginal Utility
Marginal Utility
Denotes the additional Utility arising from
consumption of an additional unit of a
commodity.
Also means Extra
Law of Diminishing Marginal Utility
The Amount of extra or marginal utility
declines as a persons consumes more and
more of a good.

Examples:

Graphical date on Total Utility and

Marginal Utility

Relationship of Total and Marginal

Utility
Total Utilities is the sum of all
marginal Utilities.
Marginal Utility Explains the law of
downward slopping demand.

History of Utility Theory

1700 Notion of Utility arose as basic idea of mathematical
probability are being develop
1738 Daniel Bernouli (mathematician) that people are adverse to
take risk and that successive new dollar of wealth bring them smaller
and smaller increments of true utility.

1748-1831 Jeremy Bentham introduce utility notion into social

sciences. all legislation should be design in utilitarian principles, to
promote the greatest happiness to the greatest number
1835-1882 William Stanley Jevons calculus of pleasure and pain.
Rational people would base their consumption goods on the extra or
marginal utility of each good. Notion of Cardinal or measurable utility
Today Economies reject the notion of Cardinal Utility. Preference . If
A is preferred over B

Equimarginal Priciple: Equal

Marginal Utilities per Peso for
Every Good

States that consumer having a FIXED INCOME and

facing a given market prices of goods will achieve
MAXIMUM SATISFACTION or utility when the MARGINAL
UTILITY of the last Peso spent on each good is EXACTLY
THE SAME as the marginal utility of the last Peso spent
on any other good.
Consumer is at EQUILIBRIUM if he MAXIMIZES TOTAL
UTILITY
Marginal Utility of Income
The incremental change in Utility (Satisfaction) that is
due to change of income
Why Demand Curve Slope Downward? The higher

3 assumptions:
Completeness Preferred, Indifferent,
Less preferred
Non-Satiation more is better
between two bundles
Transitivity A > B, B>C. Then, A>C

An Alternative Approach to Analysis of

Demand, using the Indifference Curve
1.
Substitution
Effect

Indifference Curve
Curve which shows DIFFERENT
COMBINATIONS of good X and Y which
yield the SAME LEVEL OF UTILITY
Any combinations that lies on the
indifference curve lies the same level of
utility

Marginal Rate of
Substitution
Denotes the amount of good X the
consumer is willing to give up for an
additional unit of good Y and still lies
on SAME INDIFFERENCE curve
Slope of indifference curve
Convex -> An individual is willing to
give up less of X for an additional of
Y (DIMINISHING)

2. Income Effect

Budget line
Shows the different combination of X
and Y that a consumer can purchase
for a given level of income and price.
Shift to:
Right -> Increase in income
Left -> Decrease in income

 Leisure and the Optimal Allocation of Time:

Leisure Defines as time which one spends
as one pleases
Principles of Consumer choice suggests
that you will make the best use of your time
when you equalize the marginal utilities of
the last minute spent on each activity,

 Substitution Effect Explains the

downward slopping of demand curve.
When the price of a good rises,
consumers will tend to substitute
other goods for the more expensive
goods in order to satisfy their desires
inexpensively.
Income Effect Denote that the
impact of a price change on a goods
quantity demanded that results from
the effect of the price change on

From Individual to Market Demand

Demand Curve for the Entire
Market - obtained by SUMMING UP
the quantities demanded by all the
consumers.

Demand Shifts

Summary concepts of Alternative

Approach
The substitution effect occurs when a higher price leads to
substitution of other goods for the good whose price has
risen.
The income effect is the change in the quantity demanded
of a good because the change in its price has the effect of
changing a consumers real income.
Income elasticity is the percentage change in quantity
demanded of a good divided by the percentage change in
income.
Goods are substitute if an increase in the price of one
increase the demand of the other.
Goods are complements if an increase in the price of one
decreases the demand for the other.
Goods are independent of if a price change for one has NO
EFFECT on the demand for the other.

Empirical Estimates of Price and

Income Elasticitys
Importance of the use of estimates of
Price Elasticities and Income
Elasticities

ECONOMICS OF ADDICTION

Government should establish policies

in order to minimize addiction that are
hazardous to people.

Consumer Surplus : The GAP between the TOTAL

UTILITY of a good and the TOTAL MARKET VALUE

Arises because
we receive
more than
what we pay
for as a result
of the law of
diminishing
marginal
utility.
Helps the
government
decide. Ex:
building a