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Applied Economics

CHAPTER 4
The Socio-Economic
Impact Study
LESSON 4.1
The Theory of
Consumer Behavior
Chapter Learning Objectives
• To identify and explain the various determinants
of business and industry
• To figure out how these determinants can have
an impact on concerned sectors such as the
consumers, suppliers and investors, the
government, households and on international
trade
• To discuss consumer behavior and relate it to
the benefit of business on consumers
Chapter Learning Objectives
• To discuss production theory as basis for
coming up with a viable and profitable business
• To draft a business proposal using the lessons
studied in previous chapters
• To analyze and evaluate the viability of a
business and its impact on the community
• To come up with recommendations and
strategies on how to minimize a business’
negative impact on society
Chapter Learning Objectives
• To describe the role of government in the
economy
• To describe the Philippine household as to age
and income as a basis of choosing the target
market of a business/product/service
Terms to Remember in
Chapter 4
• Consumption • Output
• Consumer theory • Fixed input
• Utility • Variable input
• Utility function • Production function
• Total utility • Total Product (TP)
• Marginal utility • Marginal Product (MP)
• The Law of Diminishing • Average Product (AP)
Marginal Utility • The Law of Diminishing
• Production Marginal Returns
• Input • The Herfindahl-
Hirschman Index (HHI)
On Consumer Theory

What is CONSUMER THEORY?

 It describes how consumers make decisions on


what to buy.
The Utility Function

What is the UTILITY FUNCTION?

 It shows the relationship between utility and consumption,


that is, utility is a function of consumption. It can be
expressed in the equation form:
U = f(C)

 To be more specific, utility for the consumption of goods X


and Y can be expressed as:
U = f(X, Y)
The Utility Function

Important measures of utility are:


TOTAL UTILITY and MARGINAL UTILITY.

 Total Utility refers to the combined utility derived from


consuming certain units of a good.

 Marginal Utility refers to the additional utility derived from


consuming an additional unit of the good.
The Utility Function
Let us study the following UTILITY SCHEDULE
of a consumer that we will call Marvin.

Increases Decreases

Hypothetical Utility Schedule of Marvin for Chocolate Candy


The Utility Function
Let us study the following UTILITY SCHEDULE
of a consumer that we will call Marvin.

Hypothetical Utility Schedule of Marvin for Chocolate Candy


The Utility Function
Let us study the following UTILITY SCHEDULE
of a consumer that we will call Marvin.

Declines
Hypothetical Utility Schedule of Marvin for Chocolate Candy
The Utility Function

What does LAW OF DIMINISHING


MARGINAL UTILITY state?

 The law states that as additional units of a good are


consumed, the additional utility derived from each
additional unit tends to diminish.
Significance Of Consumer Behavior
In Business

 If you are a business owner, it is imperative that you get to


please your consumer, so he/she will buy from you instead of
from your competitors. Moreover, once he/she buys from you
and gets satisfied in return, there is a strong possibility that
he/she will be loyal to you and not buy from other sellers of the
same product.

 Knowing how consumer satisfaction is maximized will help a


business in always keeping the consumer’s welfare the topmost
priority.