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Consumer Behaviour and Utility Maximization

This document discusses consumer behavior and utility maximization. It introduces the law of diminishing marginal utility, which states that additional units of consumption provide less and less satisfaction. Total utility is defined as the total satisfaction from consuming a quantity of a good, while marginal utility is the added satisfaction from an additional unit. The utility maximization rule is that consumers will allocate their budget in a way that equalizes the marginal utility per dollar across different goods. This explains consumer demand curves and how consumers maximize their satisfaction given prices and budgets.

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382 views15 pages

Consumer Behaviour and Utility Maximization

This document discusses consumer behavior and utility maximization. It introduces the law of diminishing marginal utility, which states that additional units of consumption provide less and less satisfaction. Total utility is defined as the total satisfaction from consuming a quantity of a good, while marginal utility is the added satisfaction from an additional unit. The utility maximization rule is that consumers will allocate their budget in a way that equalizes the marginal utility per dollar across different goods. This explains consumer demand curves and how consumers maximize their satisfaction given prices and budgets.

Uploaded by

BilalTariq
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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CONSUMER BEHAVIOUR

AND UTILITY
MAXIMIZATION

INTRODUCTION
If you were to compare the shopping carts of

almost any two consumers, you would


observe striking differences.
how individual consumers allocate their
incomes among the various goods and
services available to them.

LAW OF DIMINISHING MARGINAL


UTILITY
The simplest theory of consumer behavior

rests squarely on the Law of diminishing


marginal utility.
This principle is defined as the added
satisfaction declines as a consumer acquires
additional units of a given product.

TERMINOLOGY
Utility is a want- satisfying power
Utility'' and ''usefulness'' are not synonymous.
Utility is subjective.
Utility is difficult to quantify.

TOTAL UTILITY AND MARGINAL


UTILITY
Total utility and marginal utility are related,

but different ideas.


Total utility is the total amount of satisfaction
or pleasure a person derives from consuming
some specific quantity-for example, 10 unitsof a good or service.
Marginal utility is the extra satisfaction a
consumer realizes from an additional unit of
that product.

TOTAL UTILITY

MARGINAL UTILITY

MARGINAL UTILITY AND DEMAND


The law of diminishing marginal utility

explains why the demand curve for a given


product slopes downward.
If successive units of a good yield smaller and
smaller amounts of marginal, or extra utility,
then the consumer will buy additional units of
a product only if its price falls.

THEORY OF CONSUMER BEHAVIOR


Consumer Choice and Budget Constraint
Rational Behavior
Preferences
Budget constraint
Prices

Utility maximizing Rule


Of all the different combinations of goods and

services a consumer can obtain within his or her


budget, which specific combination will yield the
maximum utility or satisfaction?
To maximize satisfaction, the consumer should
allocate his or her money income so that the last
dollar Spent on each product yields the same
amount of marginal utility.
This is called the Utility maximizing rule.
there is no change in taste, income, products, or
prices.

ALGEBRIC
REASTATEMENT
Our allocation rule says that a consumer will

maximize her satisfaction when she allocates


her money income so that the last dollar
spent on product A, the last on product B, and
so forth, yield equal amounts of additional, or
marginal utility.
MU of product A = MU of product B
Price of A
Price of B

UTILITY MAXIMIZATION AND


DEMAND CURVE
basic determinants of an Individual's demand for a
specific product are
(1) preferences or tastes,
(2) money income, and
(3) The prices of other goods. The utility data in
Table 19.1 reflect our consumer's preferences.
We continue to suppose that her Money income
is $ 10.. And, concentrating on the construction
of a simple demand curve for product B, we
assume that the price of A, representing ''other
goods,'' is still $1.

the income effect is the impact that a

change in the price of a product has on a


consumer's real income and consequently on
the quantity demanded of that good.
The substitution effect is the impact that a
change in the products price has on its
relative expensiveness and consequently on
the quantity demanded.

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