Consumer Behavior

Theory
Consumer Behavior Theory
A set of theories explaining how consumers
behave so that producers can make their
production decisions accordingly
Utility Theory (Theory of the Consumer): assumes
that preferences and choices of consumers are
determined independently of income and prices
Indifference Theory: assumes that when given a
choice between two goods, a consumer is indifferent
to the combination of goods, as long as the goods are
in their basket; use of budget
Utility Theory
Utility satisfaction; usefulness
Total Utility (TU) total satisfaction
derived from consumption
Marginal Utility (MU) the change in total
utility derived from a unit change in
consumption of a good
Graph the Following:
No. of Servings Satisfaction/ Total
Serving (MU) Satisfaction
(TU)
1 10 10

2 9 19

3 8 27

4 7 36

5 6 42
Utility

TU

MU

No. of servings
Law of Diminishing Marginal Utility
As more of a good is consumed per period, the
marginal utility (MU) derived from consuming
one more unit of that good decreases
The more of a good consumed per period, the
smaller the increase in total utility (TU) from
consuming one more unit of that good, ceteris
paribus

> Basis for the Law of Demand

Utility Theory Conditions
Without scarcity
With scarcity: how will a consumer behave in
terms of consumption given certain constraints
(e.g. availability of resources, prices,
money/income available, substitutes available)

> Utility Theory is not very useful under scarcity

conditions, but does provide an insight into how
a consumer behaves over a period of time
The Equi-Marginal Principle
Every rational consumer wants to maximize the amount of
satisfaction they can obtain given a fixed income.
Basically, the consumer faces two limitations in their quest for
maximum satisfaction: their income and the price of the good they
prefer.
The Equi-Marginal Principle states that the consumer achieves
maximum satisfaction when the marginal utility per peso spent on a
particular good is equal to the marginal utility per peso spent on any
other good:

MUA MUB
_____ = _____
PA PB
Example: Given Budget of P70.00

Good A = P20.00 Good B = P10.00

Q MU MU/P Q MU MU/P
1 500 25 1 300 30
2 400 20 2 250 25
3 300 15 3 200 20
4 230 11.5 4 150 15
5 160 8 5 100 10
What Combinations?
What combinations of Good A and Good B
would maximize the consumers utility?
1A, 2B
2A, 3B
3A, 4B

What combinations of Good A and Good B

would maximize both the consumers utility and
budget?
1 (P20) + 2 (P10) = P 40.00
2 (P20) + 3 (P10) = P 70.00
3 (P20) + 4 (P10) = P100.00
FINAL ANSWER: 2A, 3B
Exercise
The following table illustrates Bobs utilities from watching first-run movies
in a theater, and from renting movies from a video store. Suppose that he
has a monthly entertainment budget of P600, and each movie in a theater
costs P100 while each video rental costs P50.
A. What are the combinations of movies in a theater and movies from a
video store that Bob should consider to fully maximize his utility?
B. What is the combination of movies in a theater and movies from a video
store that would maximize Bobs utility and budget? Prove by showing
the computation.
 Movies in a Theater Movies from a Video Store

Q TU MU MU/P Q TU MU MU/P

0 0 0 0
1 200 1 220

2 260 2 265

3 310 3 305

4 350 4 340

5 380 5 370

6 400 6 395