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Fundamental concept of utility or satisfaction to explain consumption and demand behavior in the short-run and the dynamics of these

tools which serve as a starting point in understanding long-run consumption behavior.

UTILITY the satisfaction derived from the consumption of a commodity which determines consumption and demand behavior. Such is the foundation of consumer behavior.

There are two ways of measuring utility:


The Cardinal utility approach
x Refers to measurement of utility by assigning numerical values, referred to as utils, such as 1 util, 12 utils, 140 utils or -35 utils.

The Ordinal utility approach


x Measures utility in terms of ranks, such as those indicating levels from most satisfying to least satisfying, best to worst, and highest to lowest.

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Utility is the technical term for satisfaction. There is a functional relationship between utility and consumption as the need for the latter arises.

This functional relationship assumes two (2) forms and is quantitatively defined as follows:
( Satisfaction from an additional unit of consumption)

MU = (TU) Q

TU (total Utility) Q (consumption) MU Marginal Utility

The symbol for change carries a positive sign when the variable increases and a negative sign if the variable decreases. As the consumption level increases, a positive marginal utility (MU) increases total utility (TU), while the opposite is true when MU is negative. Marginal utility is also defined as the utility or dissatisfaction from the last unit of consumption, depending on whether MU carries a positive or negative sign.

CONSUMPTION OF WATER
Consumption 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Total Utility 7 13 18 22 25 27 28 28 27 25 22 18 13 7 0 Marginal Utility 7 6 5 4 3 2 1 0 -1 -2 -3 -4 -5 -6 -7

UTILITY SCHEDULES

An additional unit of consumption registers a positive change and therefore, an increase in total utility (TU) so long as MU is positive. Eventually the TU curve registers a negative change, and therefore a decline where MU is negative.

The consumer is only willing to consume up to the point of maximum satisfaction from where an additional unit of consumption no longer yields additional satisfaction. Beyond this point, the additional dissatisfaction (negative MU) that the consumer begins to incur simply decreases Total utility (TU) or satisfaction.

The law states that the amount of extra or marginal utility declines as a person consumes more and more of a good.

Consumers are faced with the following realities:


- The varying prices of goods competing for his attention, and - The limited income or purchasing power he has

The most preferred combination of goods to buys is Consumer


Equilibrium.

It is expected that the rational consumer will attempt to choose an option that will offer him maximized utility.

Assume that Trisya is determining what combination of two goods , ice cream and chocolate bar, must he purchase for him to obtain maximum satisfaction with his limited allowance of P100. Price of ice cream is at P20 per cone and P15 for a bar of chocolate.

Amount of Utility (in utils)


Quantity Consumed From Ice Cream Total Marginal From Chocolate Bars Total ` Marginal

0 1 2 3 4 5 6

0 14 22 24 24 21 10

0 14 8 2 0 -3 -11

0 9 17 24 27 29 30

0 9 8 7 3 2 1

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The utility of the first cone of ice cream is 14 utils. Total utility (TU) goes up as more cones of ice cream are consumed until it reaches the highest TU point at 3 cones. The TU at the 5th and 6th cones decline as Ceazars need is fully satisfied. Marginal utility (MU) for ice cream is highest with the first cone and declines with the second and third cones. The Mus decline further with the 5th and 6th cones registering negative figures.

The highest TU for chocolate is with 6 bars but the lowest MU is also derived from 6 bars. Budget constraint of P100, only six combinations of ice cream and chocolate bars are possible.

Combination 1 2 3 4 5 6

Quantity Ice Cream + Choco Bars 1 2 3 4 5 0 5 4 2 1 0 6

Total Price P 95 100 90 95 100 90

Total Utils 43 49 41 33 21 30

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P100 Ice cream P20////// chocolate P15 P100 60 = P40..2 x 15 = P30

Another technique used in the analysis of consumer demand is based on the notion of ordinal utility. When a consumer is faced with a set of alternatives bundles of goods, he is able to rank them in order of preference. Indifference curve together with the isocost are useful tools for analyzing consumption behavior on the utility theory. Indifference curve contains varying combination in the consumption of commodities that yield the same level of total utility.
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Combination 1 2 3 4 5 6

Mangoes (in pieces) 12 10 8 6 4 2

Banana (in pieces) 2 4 6 8 10 12

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Most often, consumers use substitute good to satisfy their wants. Commodities which can be used or consumed in place of other goods are referred to as substitute goods. Two types of Substitutes:
Close Substitutes provides an almost equal level of satisfaction as that of the substituted good or service. Eg. Pineapple as to mango Weak Substitutes provides a lower level of satisfaction than the substituted good or service. Eg. Mangoes as to rice cakes as dessert during meals.

This 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. This is the line on a diagram that shows the various combinations of commodities that can be bought with a given income at a given set prices.

Cultural Culture Subculture Social Class

Social Reference Groups Family Roles and statues

Personal Age and lifecycle stage Occupation Economic Circumstances Lifestyle Personality and self-concept

Psychologica l Motivation Perception Learning Beliefs and attitudes BUYER

Exerts the broadest and deepest influence on consumer behavior.

One of the most fundamental determinants of a persons wants and behavior. While lower creatures are largely governed by instinct, Human behavior is largely learned.

Most human societies are exhibit social stratification, and it takes the form of social classes. Social classes show distinct product and brand preference. Values of individuals or peoples are highly influenced by the cultural environment.

Social factors include reference groups, family, and social roles and statuses. Reference groups are those that have a direct or indirect influence on the persons attitudes or behavior. Reference groups are those that have a direct or indirect influence on the persons attitudes or behavior.

Members of the buyers family can exert a strong influence on the buyers behavior. From parents , a person acquires an orientation toward religion, economics, personal ambition and love. Husband-wife involvement in purchases varies widely by product category. Husbands are more dominant in the purchases of insurances and cars. Wives are more dominant in the purchases of washing machines and kitchen wares.

A persons position in each group can be defined in terms or role and status. A role consists of the activities a person is expected to perform according to the person around him or her.

Each role carries a status reflecting the general esteem accorded to it by society.

Also influenced by personal outward characteristics such as: buyers age and life cycle, occupation, economic circumstances, lifestyle, personality and self-concept. People change the goods and services they buy over their lifetime. Young single people have different consumption needs from retirees; newly married couples buy different kinds of furniture from older married couples.

A persons occupation has an influence on the goods and services he buys.

A persons lifestyle and economic condition will affect the goods and services bought.
Traditionalists would buy different kinds of goods from those who would like to experiment; sportsminded-type of persons would prefer different kinds of goods from those who are the stay-home types.

A persons personality and self-concept will influence his or her buying behavior.

A persons purchases are also influenced by psychological factors: motivation, perception, learning and beliefs and attitudes. Maslows Theory of Motivation

Perception is the process by which an individual selects, organizes, and interprets information to create meaningful picture of the world. Learning, on the other hand, describes changes in an individuals behavior arising from experience.

Through perception and learning, people acquire their beliefs and attitudes. These in turn influence their buying behavior.

A belief is a descriptive thought that a person holds about something An attitude describes a persons enduring favorable and unfavorable cognitive evaluations, emotional feelings and action tendencies toward some object or ideas.

A consumer will buy a particular product, given an optimum budget, if he or she thinks and believes that the product will give him or her the best value or utility.

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