ECO 211: INTERMEDIATE

MICROECONOMICS

THEORY OF CONSUMER BEHAVIOUR

University of Malawi
Department of Economics

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O

Theory of Consumer Behaviour

Walters (1974) defines consumer behaviour as: ” The process

whereby individuals decide whether, what, when, where, how,
and from whom to purchase goods and services.”

Schiffman and Kanuk (1997) define consumer behaviour as:

”The behaviour that consumers display in searching for,
purchasing, using, evaluating, and disposing of products,
services, and ideas.”

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O

Theory of Consumer Behaviour

Consumer behaviour theory is the study of how people make

decisions when they purchase, helping businesses and
marketers capitalise on these behaviours by predicting how
and when a consumer will make a purchase.

It helps to identify what influences these decisions, as well as

highlight strategies to proactively manipulate behaviour.

The theory of consumer behaviour has been reformulated

entirely in terms of consumer preferences, and utility is seen
only as a way to describe preferences.

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The Utility Function
A utility function is a way of assigning a number to every
possible consumption bundle such that more-preferred bundles
get assigned larger numbers than less-preferred bundles
A bundle (x1, x2) is preferred to a bundle (y1, y2) if and only if
the utility of (x1, x2) is larger than the utility of (y1, y2)
In other words, (x1, x2) ≻ (y1, y2) if and only if
u(x1, x2) > u(y1, y2).
Two forms of utility theories - Cardinal utility and Ordinal
utility
Ordinal utility refers to theories of utility that attach
importance to ordering bundles of goods over the
magnitude of the utility
Cardinal utility refers to theories of utility that
attach significance to the magnitude of utility.
We will mostly look at ordinal utility theories
ECO 211: INTERMEDIATE MICROECONOMICS THEORY O
The Utility Function

A monotonic transformation is a way of transforming one

set of numbers into another set of numbers in a way that
preserves the order of the numbers

If u1 > u2 and f (u1) > f (u2), then f (u) transforms u in a way

that preserves the order

Examples of monotonic transformations - multiplication by a

positive number (f (u) = 3u), adding any number
(f (u) = u + 17), raising u to an odd power (f (u) = u3), and
so on

The rate of change of f (u) as u changes can be measured as

△f
△u
= f (u2)−f (u1)
u2−u1

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O

The Utility Function

If f (u) is any monotonic transformation of a utility function

that represents some particular preferences, then f (u(x1, x2))
is also a utility function that represents those same
preferences. Why?
To say that u(x1, x2) represents some particular preferences
means that u(x1, x2) > u(y1, y2) if and only if
(x1, x2) ≻ (y1, y2).
But if f (u) is a monotonic transformation, then
u(x1, x2) > u(y1, y2) if and only if f (u(x1, x2)) > f (u(y1, y2)).
Therefore, f (u(x1, x2)) > f (u(y1, y2)) if and only if
(x1, x2) ≻ (y1, y2), so the function f (u) represents the
preferences in the same way as the original utility function
u(x1, x2).

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O

Indifference Curves
Given a utility function, u(x1, x2), you obtain an indifference
curve by plotting all the points (x1, x2) such that u(x1, x2)
equals a constant.
Indifference curve is a graph that shows the combinations of
(x1, x2) that the consumer is indifferent
For each different value of the constant, you get a different
indifference curve.

Let the utility function be given as:

u(x1, x2) = x1x2
For a constant k, we can solve for x1 as :
x1 = k
x2
The indifference curve will be found by mapping the
combinations of x1 and x2 that maintains a level of k
Practice: Plot an indifference curves for k = 1,2,and5
ECO 211: INTERMEDIATE MICROECONOMICS THEORY O
Examples of Utility Functions
Perfect substitutes
Two goods are perfect substitutes if the consumer is willing to
substitute one good for the other at a constant rate

The consumer cares mostly about total number of

commodities.

Good example would be black and blue pens.

The simplest utility functions for perfect substitutes can be
given as:
u(x1, x2) = x1 + x2
This can be generalised as:
u(x1, x2) = ax1 + bx2
a and b are some positive numbers that measure the “value”
of goods 1 and 2 to the consumer

The slope of a typical indifference curve is given by − ba

Marginal Rate of Substitu t ion ECO 211: INTERMEDIATE MICROECONOMICS THEORY O
Examples of Utility Functions
Perfect substitutes
Indifference curves for perfect substitutes

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O

Examples of Utility Functions
Perfect Compliments
Perfect complements are goods that are always consumed
together in fixed proportions.

A good example of perfect complements are the right shoes

and left shoes

Utility function for perfect complements takes the form

u(x1, x2) = min{x1, x2}.
Example - adding a right shoe to six pairs of shoes does not
increase the pairs of shoes.

General form of utility function of perfect complements is

given as:
u(x1, x2) = min{ax1, bx2}
where a and b are positive numbers that indicate the
proportions in which the goods are consumed.
ECO 211: INTERMEDIATE MICROECONOMICS THEORY O
Examples of Utility Functions

Perfect Compliments
Indifference curves for perfect compliments

Left Shoes

Right shoes

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O

Examples of Utility Functions

Indifference curves for These are utility functions

quasilinear preferences that are partly (quasi)
linear and they take a form:
u(x1, x2) = f (x1) + x2

The utility curve is linear in

good x2 but (possibly)
nonlinear in good x1

Specific examples of
quasilinear utility functions
u(x1, x2) = 𝑋1 +x2
u(x1, x2) = lnx1 + x2

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O

Examples of Utility Functions
Cobb-Douglas Preferences
Indifference curves for Cobb Cobb-Douglas utility
Douglas preferences function is given as:
u(x1, x2) = x1c xd2
where c and d are positive
numbers that describe the
preferences of the
consumer

Cobb-Douglas indifference
curves look just like the
nice convex monotonic
indifference curves and are
referred to as
“well-behaved indifference
curves”
ECO 211: INTERMEDIATE MICROECONOMICS THEORY O
Examples of Utility Functions

Cobb-Douglas Preferences
Taking the natural log of the Cobb-Douglas utility function we
obtain:
v(x1, x2) = ln(xc1 xd2 ) = clnx1 + dlnx2
The indifference curves for this utility function will look just
like the ones for the first Cobb-Douglas function, since the
logarithm is a monotonic transformation.

We can also take monotonic transformations that make the

exponents of the Cobb-Douglas utility function make the sum
to 1.
v(x1, x2) = x1ax 21−a

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Marginal Utility and Marginal Rate of Substitution
Marginal utility is defined as the extra utility obtained by
consuming one more unit of a good.

Mathematically,Marginal Utility of x1, MU1 is given as

u(x1+△x1,x2)−u(x1,x2)
MU1 = △U
△x1
= △x1

MU1 measures the rate of change in utility (△U) associated

with a small change in the amount of good 1 (△x1).

This implies that

△U = MU1△x1
Marginal rate of substitution (MRS)is the rate at which a
consumer is willing to substitute a small amount of good 2
for good 1 to maintain the same level of utility
MRS is measured as the slope of the indifference curve at a
given bundle of goods
ECO 211: INTERMEDIATE MICROECONOMICS THEORY O
Marginal Utility and Marginal Rate of Substitution

Consider a change in the consumption of each good,

(△x1, △x2), that keeps utility constant
MU1△x1 + MU2△x2 = △U = 0

Solving for the slope of the indifference curve we have

△x 2
MRS = △x1 = − MU
MU2
1

The ratio of marginal utilities gives us the marginal rate

of substitution.

MRS is negative because to maintain the same level of utility,

you get more of good 1 and less of good 2. However,
economists often refer to the MRS by its absolute value.

ECO 211: INTERMEDIATE MICROECONOMICS THEORY O