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The Consumers BehaviorThe Concept of Choice and Utility

Utility - the ability of something to satisfy needs or wants

Utility denotes satisfaction, a subjective pleasure that an individual can derive from consuming a good or service. In economics, it explains how individuals divide their limited resources among the commodities that provide them satisfaction. The Concept of Choice and Utility

The consumer prefers the best bundle of goods that he can affordThe Concept of Choice and Utility

Tastes, preferences and income are the factors that make an individual decide what bundle of goods to consume.

Tastes and preferences define what you like about the good, and the utility or satisfaction you receive when consuming various goods. The Concept of Choice and Utility

Example: Price of pandesal = 1 peso per piece You would buy 70 pieces per week. If price of pandesal = .50 centavos per piece You would buy more.

The Concept of Choice and Utility

Can We Measure Satisfaction or Utility? Ordinal utilitytheorystates that while theutilityof a particulargoodor service cannot be measured using a numerical scale, pairs of alternative bundles of goods can be ordered such that one is considered by an individual to be worse than, equal to, or better than the other. This contrasts withcardinal utilitytheory, which generally treats utility as something whose numerical value is meaningful in its own right.Tastes and PreferencesTastes and preferences are subjective in nature.Basically, your tastes and preferences will tell something about your personality. Your preferences depict which goods provide satisfaction and how much satisfaction you will receive. Law of Diminishing Marginal Utility- This law states that as an individual consumes more units of commodity per unit of time, his/her total utility increases, reaches its maximum, and starts to decrease.Law of Diminishing Marginal UtilityExample: Pork Lechon is one of your favorite Filipino food. Your breakfast of pork lechon gives you a magnificent meal. Your lunch of the same meal doesnt give the same tasty experience, meaning the extra satisfaction or your marginal utility is already diminishing. Your dinner with pork lechon gives you less and less utility.

Pork Lechon(Qx)Total Utility(TU)Marginal Utility(MU)0017.5117.513.523110.5341.58.545045540654Example: Suppose a person eats Bread and 1st unit of bread gives him maximum satisfaction. When he will eat 2nd bread his total satisfaction would increase. But the utility added by 2nd bread(MU) is less than the 1st bread.Law of Diminishing Marginal UtilitySlices of Bread(Qx)Total Utility(TU)Marginal Utility(MU)00-17070211040313020414010514556140-5

The Consumers EquilibriumConsumer Equilibriuma situation in which a person gets maximum satisfaction and has notendencyto change his pattern of consumptionUtilitya Want satisfying power of any commodity is known as consumer equilibriumTotal Utility- It is the sum total of utility derived from the consumption of all units of a commodityThe Consumers EquilibriumMarginal Utilityrefers to additional utility on account of the consumption of an unit of a commodityBudget lineIt refers to attainable combinations of sets of two commodity at given prices of commodity and income of the consumerUtils- fictional units - which serve to quantify the consumer's additional utility or satisfaction from consuming different quantities

The Consumers Equilibrium- the meeting point of consumers needs and resource.

Example: FRUITS (X) = $2 VEGETABLE (Y) = $1

INCOME = $5FRUITS (X)VEGETABLES (Y)SOLUTION: The Consumers Equilibrium3 Assumptions of rational References: Completeness A property of preference that implies a bundle of goods can be ranked as Preferred, Indifferent, or less preferred to one another.

Nonsatiation - Known as the More is Better property of preferences.

Transitivity If bundle A is preferred over bundle B, and bundle B is preferred over bundle C, then Bundle A is preferred over bundle C.The indifference curve- A curve that show combination of goods which gives that same level of satisfaction to the consumers so that an individual is indifferent.The indifference curve

An Indifference Schedule

The indifference curveCharacteristics of Indifference Curve Negatively Sloped Convex to origin Do not intersectThe indifference curve Negatively slopedNegatively sloped can be defined through marginal rate of substitution (MRS). Marginal rate of substitution is the amount of units of good x have to be given up in order to gain an extra unit of good y, while keeping the same level ofutility.

The indifference curve Convex to OriginAn indifference curve is convex to the origin because of the diminishing MRS, which means an individual is willing to give up less of Y to gain additional units of X. Or less of the remaining good Y makes it more valuable than the additional unit of good X.

The indifference curve Do not intersect

THE BUDGET line- The budget line show the different combinations of x and y that the consumer can purchase given his income and the prices of the goods.

- A budget line describes the limits to consumption choices and depends on a consumers budget and the prices of goods and services.THE BUDGET lineYXBudget LineTHE BUDGET lineYXMovement of Budget LineInitial Budget LineSample Graph

30THE BUDGET lineIndifference Curve- is a graph showing different bundles of goods between which a consumer is indifferent that is, at each point on the curve, one can equivalently refer to each point on the difference curve as rendering the same level of utility (satisfaction) for the consumer. Utility is then a device to represent preferences rather than something from which preferences come.Sample Graph

THE BUDGET lineFinding Consumer's Equilibrium Subject to Budget ConstraintsA consumer is in equilibrium when, given his income and the price of goods, the consumer maximizes the total utility. Or a consumer is in equilibrium when the tangency of the budget line and the indifference curve is achieved.The Price Consumption CurveIncome Consumption- Is a collection of points of consumer equilibrium resulting from varying income.Shape of Income-Consumption CurveUpward-sloping if good X is normalIf consumer income rises, consumes more of good XDownward-sloping if good X is inferiorIf consumer income rises, consumes less of good X

The Price Consumption CurveEngel curve- shows the amount of a commodity that the consumer would buy per unit of time at different level of income

The Price Consumption CurvePrice Consumption Curve- Is a collection of points of consumers equilibrium resulting from varying the price of good Y.

Income & Substitution EffectIncome effect- An increase in price reduces a consumers buying power, effectively reducing the consumers income and causing the consumer to buy less of at least some goods.

Income effectdescribes the effects of changes in prices on consumption. According to the income effect, an increase in price causes a buyer to demand the lower quantity of the commodity and vice versa. Although the buyer's actual income hasn't changed, the change in price makes the buyer feel as it has because his real income has decreased.Income & Substitution EffectExample:

Income & Substitution EffectDefinition of Substitution effect: If utility held constant, as the price of the good increases, consumers substitute other, now relatively cheaper goods for that one.The Substitution Effect

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MICROECONOMICS | MWF 5-6 Professor Januel Hebrado

GROUP 1

Adolfo, Camille Eusebio, Danica Sesbreo, JustineAlbis, KatrinaIgnacio, KarlPascua, NikkiBandong, PaulaManansala, JerardOlin, QueenieDelos Reyes, RovinsonMateo, ZhalynQuiosa, EllaGuevarra, JoymeeMoreno, RaymundoVito, Amynah