Chapter 4

Consumer Behavior
Consumer Behavior
• The Concept of Utility
• Consumer Equilibrium
• Indifference Analysis
• Substitution
• The Budget Line
Consumer Behavior
To satisfy WANTS, consumers make CHOICES
as frequent as wants are felt.
 “Break Up”
“Wake Up”
or HOLD ON or LET GO
EARLY or LATE?

“Breakfast” or

EGG or FISH
Consumer Behavior
To satisfy WANTS, consumers make CHOICES
as frequent as wants are felt.

“How useful is knowledge of consumer behavior?”

 It lies on how important are profits to the firms.
Consumer Behavior
 It is very important for firms to synchronize their
production efforts to match the purchasing behavior
of consumers.
 If not, losses and bankruptcy are highly probable.
 Understanding the concepts of utility are
preliminary items.
The Concept of Utility
 As an individual has wants, it is normal for him to
desire to satisfy those wants.

“How then is the consumer able to establish a set

of preferences for goods and services?”
CONCEPT OF UTILITY
The Concept of Utility
UTILITY
 is the power of goods and services to satisfy wants.
 The pleasure or satisfaction associated with having, using,
consuming, or benefiting from goods or services.
 The utility of certain good varies from person to person.
 The quality of the product or service is primarily
responsible for its power to satisfy wants.
The Concept of Utility
 Causes and Sources Of Utility
• Security
• Pride
• Power
• Pleasure
• Comfort
• Ease of use
 A product or service may satisfy two different
persons but the level of satisfaction will also be
A good may satisfy a person, different.
may not necessarily satisfy
another.

A thing that possesses a want-gratifying

quality may not possess utility if it is not A utility of a certain good
capable of being used. varies from person to person.
The Concept of Utility
MEASURING UTILITY
Economists have proposed two ways of measuring utility:

1. The Cardinal Utility Approach

 the measurement of utility by assigning numerical
values, referred to as UTILS.

2. The Ordinal Utility Approach

measures utility in terms of ranks.
The Concept of Utility
THE CONCEPT OF MARGINAL UTILITY
• Marginal Utility
the satisfaction an individual receives from consuming one
additional unit of good or service
the total utility of the product and service increases as more
units are consumed
the increase in utility
 SCHEDULE OF TOTAL AND MARGINAL
UTILITY FOR MARIA SUNGA
Guavas Consumed Total Utility Marginal Utility
(in pieces) (in utils) (in utils)

1 50 50

2 80 30(or 80-50)
This indicates full
3 100 20(or 100-80) satisfaction of
Maria’s need for
4 110 10(or 110-100) guavas at that
particular time.
5 90 -20(or 90-110)
Total utility declined
as Maria felt
6 20 -70(or 20-90) satiated.
It is important to take note that marginal utility
decreases as more pieces of guavas are consumed.
The Concept of Utility
THE CONCEPT OF MARGINAL UTILITY
• Marginal Utility
the satisfaction an individual receives from consuming one
additional unit of good or service
the total utility of the product and service increases as more
units are consumed
the increase in utility

• Law Of Diminishing Marginal Utility

states that “the amount of extra or marginal utility declines
as a person consumes more and more of a good.”
 The Concept of Utility
TOTAL UTILITY CURVE MARGINAL UTILITY CURVE
60 50
120 110
100
90 40 30
100
20
Total Utility

Marginal Utility
80
80 20 10
(in Utils)

(in Utils)
60 50 0
-20
40 -20 1 2 3 4 5 6
20
20 -40

0 -60 -70
1 2 3 4 5 6
-80
Quantity Quantity
(in pieces) (in pieces)
Consumer Equilibrium
- the most referred preferred
combination of goods to buy.

Decision-making The consumer cannot buy

everything he wants
because of his limited
income.
Realities
He will be forced to compromise
and decide what and how much of
The varying prices of The limited income each of many items he can afford
goods competing for or purchasing and will best suit his needs.
his attention. power he has.
Consumer Equilibrium
UTILITY MAXIMIZATION
 It is expected that the rational customer will attempt to
choose an option that will offer him maximized utility.
 The total utility of the product increases as more units are
consumed but only up to a certain extent.
Consumer Equilibrium

Let’s assume that Maria Sunga is determining what

combination of two goods, ice cream and chocolate bar, must
she purchase for her to obtain maximum satisfaction with her
limited fund of ₱100. Maria is confronted with the price of ice
cream at ₱20 per cone and ₱15 for a bar of chocolate,
regardless of how many are bought.
Consumer Equilibrium
The utility of the 1st
THE UTILITY OF TWO GOODS cone of ice cream is
14 utils from Maria’s
Amount of Utility
(in utils) point of view.
Quantity From Ice Cream From Chocolate Bars
Total utility (TU) goes
Consumed Total Marginal Total Marginal up as more cones of
0 0 0 0 0 ice cream are
1 14 14 9 9 consumed until it
2 22 8 17 8 reaches the highest
TU point at 3 cones.
3 24 2 24 7
4 24 0 27 3 The TU at the 5th and
5 21 -3 29 2 6th cones decline as
6 10 -11 30 1 Maria’s need is fully
satisfied.
Consumer Equilibrium The marginal utility
(MU) for ice cream is
THE UTILITY OF TWO GOODS
highest with the 1st
Amount of Utility cone and declines
(in utils) with the 2nd and 3rd
Quantity From Ice Cream From Chocolate Bars cones.
Consumed Total Marginal Total Marginal
0 0 0 0 0 The MUs decline
further with the 5th
1 14 14 9 9
and 6th cones
2 22 8 17 8 registering negative
3 24 2 24 7 figures.
4 24 0 27 3
5 21 -3 29 2 The highest TU for
chocolate is with 6
6 10 -11 30 1
bars but the lowest
MU is also derived
from 6 bars.
Consumer Equilibrium
SCHEDULE OF COMBINATIONS FOR MARIA With the budget
SUNGA’S UTILITY MAXIMIZATION constraint of ₱100,
Quantity Total Total only 6 combinations of
Combination Ice Cream + Choco Bars Price Utils ice cream and
chocolate bars are
1 1 5 ₱95 43
possible.
2 2 4 100 49
The maximum utility
3 3 2 90 41 that Maria can derive
from spending her
4 4 1 95 33 ₱100 is with
Combination 2.
5 5 0 100 21

6 0 6 90 30
Indifference Analysis
 Another technique used in the analysis of consumer demand is based on the
notion of ordinal utility.

 The most useful method of analyzing consumer demand.

When a consumer is faced with a
set of alternative “bundles” of
goods, he is able to rank them all in
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.
Indifference Analysis
INDIFFERENCE SCHEDULE The sample indicates
that Maria will derive
Mangoes Guavas
Combination
equal satisfaction from
(in pieces) (in pieces) all combinations listed.
1 12 2 Maria is indifferent to all
2 10 4 the various combinations.

3 8 6

4 6 8

5 4 10

6 2 12
Indifference Analysis
THE INDIFFERENCE CURVE
Indifference Curve  The line joining all points
14
when the indifference is
12
plotted on a graph.
10 Indifference Curve
(in pieces)
Mango

8
 All points in the curve
6
indicate their respective
4
combinations of goods
2
and services which yield
0
equal levels of
2 4 6 8 10 12
satisfaction.
Guavas
(in pieces)
Substitution
 Consumers use substitute
goods to satisfy their
wants
 Commodities which can be
used or consumed in place
of other goods are
referred to as substitute
goods.
 It is exercised by the
consumer when there are
available goods and
services which yields the The demand for bananas
same level of satisfaction will increase.
but at lower costs.
Substitution
 If a rise in the price of a
good causes an increase
in the demand for
another, these two
goods qualify as
substitutes.
 When two or more
substitutes are available,
the consumers will
generally choose the
lowest- priced
commodity.
Substitution
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
 It is a useful tool in determining the combinations of goods
and services that will satisfy the consumer with a limited
income or budget to spare.
 “the line on the diagram that shows the various
combinations of commodities that can be bought with a given
income at a given set prices.”
The Budget Line
THE UTILITY OF TWO GOODS
Amount of Utility
(in utils)
Quantity From Ice Cream From Chocolate Bars
Consumed Total Marginal Total Marginal
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
The Budget Line
THE BUDGET LINE FOR TWO GOODS Any point on the
A
budget line gives a
5
4.5 B combination of ice
4
3.5
cream and chocolate
Ice Cream

bars that can be

C
3
2.5
bought and that
D
2
1.5
1
E exhausts the entire
0.5 F budget of Maria,
0
1 2 3 4 5 6 7
given the prices of
Chocolate Bar
ice cream and
chocolate bars.
The Budget Line
THE BUDGET LINE FOR TWO GOODS Any point below
A
the budget line is
5
4.5 B feasible but
4
3.5
Maria will not be
Ice Cream

exhausting her
C
3
2.5 D
2 entire budget.
1.5
1
E Any point above
0.5 F the budget line
0
1 2 3 4 5 6 7
cannot be
Chocolate Bar
covered by
Maria’s income.
THE END