Theory of Consumer Behavior 2010

8/2/2019 Theory of Consumer Behavior 2010

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THEORY OF

CONSUMERBEHAVIOR


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WHAT will I LEARN today?

Understand and apply the marginalutility concept in explaining how a

consumer makes purchase

decision

Learn the step-by-step process infinding optimal units of goods that

are affordable and at the same timewill give the highest satisfaction

Derive a demand curve using theequilibrium price and quantity

demanded


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I can get no satisfaction

ROLLING STONES

LET US HEAR THEM SING THEN & NOW!


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UTILITY ???

A set of services provided by these

organizations (public utilities) consumed

by the public(Wikipedia)


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UTILITY is

Dictionary defines UTILITY asusefulness, service, value, worth or

benefit

In Economics, UTILITY means thesatisfaction, happiness or benefits

that result from the consumption ofa good.

UTILITY is the basis of choice


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CAN YOUR SATISFACTION

BE MEASURED?


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The theory faces 2 major

problems

1. It is impossible to MEASURE

satisfaction or utility objectively


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I CAN GET NO SATISFACTIONBUT I

TRY, AND I TRY

2. It is impossible to COMPARE the

satisfaction or utilities of twopersons or among individuals

VS


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BUT I TRYNGA EH!

UTIL is a measure of satisfaction orhappiness

UTIL is an artificial construct or

arbitrary or subjective number usedto measure utility or satisfaction

The higher the UTIL the higher

the satisfaction or utility


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EXAMPLE NAMAN DYAN

What did you eat for breakfast?

++

30 utils 20 utils 50 utils


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This just shows that one canASSIGN any number of UTIL to a

GOOD consumed.The util is a subjective value thatindicates the persons level of

SATISFACTION derived fromCONSUMING a GOOD.


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TOTAL VS. MARGINAL UTILITY

TOTAL UTILITY The TOTALsatisfaction a person receives fromconsuming a particular quantity of agood

MARGINAL UTILITY The

ADDITIONAL utility a person receivesfrom consuming an extra unit of aparticular good.


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LETS COMPUTE UTILS FOR 1 GOOD

CUPS OFCOFFEE

TOTALUTILITY

MARGINALUTILITY

0

1

2

3

4

5

0

10

19

27

34

40

-

10

9

8

7

6


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TU2 TU1/Q2 Q1= MU1 (extra utilsderived from consuming one more

cup of coffee

CUPS OFCOFFEE

TOTALUTILITY

MARGINALUTILITY

Q10

Q21

2

3

4

5

TU10

TU210

19

27

34

40

-

10- 0=10

19- 10=9

27 19=8

34 27=7

40 34=6


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LETS FOCUS ON THE MARGINALUTILITY OF COFFEE

MARGINALUTILITY

-

10- 0=10

19- 10=9

27 19=8

34 27=7

40 34=6

THE MARGINAL UTILITYDECREASES AS MORE CUPSOF COFFE IS CONSUMED

OR THE UTILITY ISDIMINISHING ORDECREASING

THIS IS CALLEDLAWOF DIMINISHINGMARGINAL UTILITY


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TOTAL UTILITY CURVE

50

40

30

20

10

1 23

4

5


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MARGINAL UTILITY CURVE

10

8

6

4

2

1 23

4

5


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WHY DEMAND CURVE IS DOWNWARDSLOPING

One of the reasons is the LAW OF DIMINISHINGMARGINAL UTILITY

The inverse relationship of price and quantity

demanded is partly explained by the law ofdiminishing marginal utility.

As one consumes successive units of a specificgood, the less utility it can give. Therefore, inorder to consume more units of a less satisfyinggoods, the price of the good must decrease.


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DEMAND CURVEonce again!

P

Q

D

P1

P2

Q1 Q2

I will only buy more units ofthe good if you will give me adiscount! Or make the goodcheap so that I can buy large

quantities of the good.

Since the satisfaction I getfrom consuming extra units ofgood decreases, I will only buythe good at a lower price!


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A Consumer...?

Is rational

Has own preference

Has limitedbudget/resources

Faces goods which

are not free or goodswith prices


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COMPUTATION NAnow na?Wait lang!

The goal of a consumer is to maximizesatisfaction or utility given the limited

income. Given the limited income and the prices

of goods, the consumer would want toobtain the highest utility possible.

This is accomplished by applying themarginal utility concept.


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Problem solving:

Consumer has to decide how many ofGood A and Good B to buy

Good A is worth 1 pesos

Good B is worth 2 pesos

Consumer has a total 10 pesos as incometo allocate for the Goods A & B


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How to determine the

equilibrium quantity of A & B?

1st condition

MU A / Price A = MU B / Price B

2nd condition

INCOME = PriceA X Quantity A + Price B X Quantity B

LAW OF EQUIMARGINAL PRINCIPLE


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STEPS IN FINDING EQUILIBRIUM UNITS

Compute the Marginal Utility =

(TU2-TU1)/ (Q2- Q1)

Divide MU by the price of the good

Find units of A and B that satisfy the 1stcondition

MU of A/ Price of A = MU of B / Price of B

Select the best combination by applyingthe 2nd condition- budget equation

Y = P1X1 + P2X2


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Compute the Marginal Utility= (TU2-TU1)/ (Q2- Q1)

Divide MU by the price of thegood


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GOOD A which has a price of 1 peso

Good A TOTALUTILITY

MARGINALUTILITY

1

2

3

4

5

6

7

10

18

25

31

36

40

43

10 0=10

18- 10=8

25 18=7

31 25=636 31=5

40 36=4

43 40=3

MU/ P

10/1

8/1

7/1

6/15/1

4/1

3/1


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GOOD B which has a price of 2pesos

Good A TOTALUTILITY

MARGINALUTILITY

1

2

3

4

5

6

7

24

44

62

78

90

96

100

24 0=24

44- 24=20

62 44=18

78 62=1690 78=12

96 90=6

100 96=4

MU/ P

24/2 = 12

20/2 = 10

18/2 = 9

16/2 = 812/2 = 6

6/2 = 3

4/2 = 2


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Find units of A and B thatsatisfy the 1st condition

MU of A/ Price of A

= MU of B / Price of B


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UTILITY MAXIMIZING COMBINATIONOF GOODS A AND B

GOOD A =1 PESO GOOD B =2 PESOS

Unit MU MU/P Unit MU MU/P

1

2

3

4

56

7

10

8

7

6

5

4

3

10

8

7

6

54

3

1

2

3

4

56

7

24

20

18

16

126

4

12

10

9

8

6

3

2


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MUA/PA = MUB/PB 3 combinations of Good A and Good B fulfill thisequilibrium condition

MUa/Pa =MUb/Pb

Good A Good B

10 =10 1 2

8 = 8 2 4

6 = 6 4 5

3 = 3 7 6


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All 3 are good but which is best

The one which can use up all yourincome/ affordable

Y = PAGA + PBGB budget equation

1stcomb 10 1(1) + 2(2) under

2nd comb 10=1(2) + 2(4) just enough

3rd comb 10 1(4) + 2(5) over

4th comb 10 1(7) + 2(6) over


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UTILITY MAXIMIZINGRULE

MU / P of Good A = MU / P of Good B

Given income of the consumer, he will

buy the affordable and at the same timethe combination that will give the highestpossible satisfaction.


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PRACTICE NAHAVE A BLESSED DAY!

Theory of Consumer Behavior 2010

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