Theory of Consumer Behavior

THE LAW OF DEMAND (a closer look) The Income Effect A lower price frees income for additional purchases and vice versa. The Substitution Effect A lower price relative to the other goods attracts new buyers- and vice versa.

Utility Concepts and Measurement

19th century economists (Jevons, Walras & Marshall) considered the amount of satisfaction derived from the consumption of a commodity is called utility. * the satisfaction of consuming a certain commodity can be measured by means of utility. * the amount of satisfaction/degree of satisfaction is called utils.

 Cardinal Utility the amount of satisfaction from the consumption of a good is measurable like the weight of objects, thus consumers are presumed to be capable of assigning to every good a number representing the degree of utility. Ordinal Utility - 20th century economists (Pareto, Hicks, Slutsky) it is enough for the consumers to be able to rank bundles of commodities according to the order of their preferences to indicate the degree of utility derived from such bundles.

Law of Diminishing Marginal Utility

Characteristics of the concept of Utility Utility and usefulness are not synonymous. Utility is subjective. Utility is difficult to quantify. ( the amount of satisfaction can be measured by assigning units called utils.)

Total Utility and Marginal Utility

Total Utility- is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity. Marginal Utility- is the extra/ additional satisfaction a consumer realizes from an additional unit of a certain product.

Schedule of total and marginal utility

(1) (2) (3)

Rice consumed per meal

Total Utility Utils

Marginal Utility Utils

0 1 2 3 4 5 6 7

0 10 18 24 28 30 30 28

 Law of Diminishing Marginal Utility

- the principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases. - as more and more of a good are consumed, the process of consumption will ( at some point) yield smaller and smaller additions to utility.

Exercise: Compute for the marginal utility and graph both Total Utility and Marginal Utility.
Schedule of Total and Utility of a student
(1) No. of Marginal glasses of softdrinks consumed (2) Total Utility (3) Marginal Utility (MU=TU/Q)

0 1 2 3 4 5 6

0 20 27 32 35 35 34

Marginal Utility and Law of Demand

Utility is measured by how much you are willing to pay for something. (Slavin, 2009) note: marginal utility is equal to price * The more you have, the less willing for you to pay a high price.
Price No. of Hamb urger MU TU

40 32 20 10

1 2 3 4

40 32 20 10

40 72 92 102

Practice Set 1: Compute for the Marginal Utility and Total Utility
Price Quantity Demanded Marginal Utility Total Utility

15 12

1 2

10
7 5 4

3
4 5 6

Theory of Consumer Behavior

Consumer Choice and Budget Constraint Assumptions: 1. Rational Behavior 2. Clear-cut Preferences 3. Subject to Budget Constraint 4. Responds to Price Changes

Consumer Equilibrium
How is it done? (base on the example) you will consume additional glasses of iced tea until the last peso of your income spent on iced tea gives no higher utility than the last peso spent on hamburgers the marginal utility derived from the last peso spent on a glass of iced tea is just equal to the marginal utility derived from the last peso spent on a piece of hamburger.

Utility-Maximizing Rule/ Equi-marginal Principle of Utility Maximization

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 extra (marginal) utility.
no incentive to alter his or her expenditure pattern. no opportunity to improve utility

Now it is possible that several combinations of good X and Y will yield the satisfaction of the equi-marginal condition. But beside the prices of goods, an additional constraint is the amount of money needed to purchase such commodities.

I = Px(X) + Py(Y)

Marginal utilities per peso worth of fishballs and siomai

Qty. TU from Fishball (TUfd) MU from fishball (MU fb) MUfb Pfb TU from siomai (TUs) MU from siomai (MU) MUs Ps

1 2 3 4 5 6

30 39 45 50 54 56

50 105 148 178 198 213

Given: Pfb = 2 pesos per stick of fishball Ps = 10 pesos per serving of siomai INCOME = 60 pesos a. What combination of fishballs and siomai will maximize utility? b. Does this meet the income constraint?

Time allocation and expected grades

ECONOMICS
Hrs. Grade Marginal Grade

MATHEMATICS
Hrs. Grade Marginal Grade Hrs.

ENGLISH
Grade Marginal Grade

0 1 2 3 4 5 6

20 45 65 75 83 90 92

25 20 10 8 7 2

0 1 2 3 4 5 6

40 52 62 71 78 83 86

12 10 9 7 5 3

0 1 2 3 4 5 6

80 90 95 97 98 99 99

10 5 2 1 1 0

ECONOMICS
Hrs. Grade Marginal Grade

MATHEMATICS
Hrs. Grade Marginal Grade Hrs.

ENGLISH
Grade Marginal Grade

0 1 2 3 4 5 6

20 45 65 75 83 90 92

25 20 10 8 7 2

0 1 2 3 4 5 6

40 52 62 71 78 83 86

12 10 9 7 5 3

0 1 2 3 4 5 6

80 90 95 97 98 99 99

10 5 2 1 1 0