Theory of Consumer Behavior.pptx

8/14/2019 Theory of Consumer Behavior.pptx

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Theory of Consumer Behavior

THE LAW OF DEMAND(a closer look)

The Income Effect

A lower price frees income for additionalpurchases and vice versa.

The Substitution Effect

A lower price relative to the other goods attractsnew buyers- and vice versa.


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Utility Concepts and Measurement

19thcentury economists (Jevons, Walras &Marshall) considered the amount ofsatisfaction derived from the consumption of

a commodity is called utility.

* the satisfaction of consuming a certaincommodity can be measured by means of

utility.* the amount of satisfaction/degree ofsatisfaction is called utils.


3/18

Cardinal Utility the amount of satisfactionfrom the consumption of a good ismeasurable like the weight of objects, thusconsumers are presumed to be capable ofassigning to every good a number

representing the degree of utility. Ordinal Utility - 20th century economists

(Pareto, Hicks, Slutsky) it is enough for theconsumers to be able to rank bundles ofcommodities according to the order of theirpreferences to indicate the degree of utilityderived from such bundles.


4/18

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 measuredby assigning units called utils.)


5/18

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.


6/18

Schedule of total and marginal utility

(1)Rice consumed per

meal

(2)Total Utility

Utils

(3)Marginal Utility

Utils

0 0

1 102 18

3 24

4 285 30

6 30

7 28


7/18

Law of Diminishing Marginal Utility

- the principle that as a consumerincreases the consumption of a good orservice, the marginal utility obtained from

each additional unit of the good or servicedecreases.

- as more and more of a good areconsumed, the process of consumption will (at some point) yield smaller and smalleradditions to utility.


8/18

Exercise: Compute for the marginal utility and graph

both Total Utility and Marginal Utility.

Schedule of Total and Marginal

Utility of a student

(1)

No. of

glasses of

softdrinks

consumed

(2)

Total Utility

(3)

Marginal Utility

(MU=TU/Q)

0 0

1 20

2 27

3 32

4 35

5 35

6 34


9/18

Marginal Utility and Law of Demand

Utility is measured byhow much you arewilling to pay for

something. (Slavin,2009)

note: marginal utility isequal to price

* The more you have, theless willing for you topay a high price.

Price No. of

Hamb

urger

MU TU

40 1 40 40

32 2 32 72

20 3 20 92

10 4 10 102


10/18

Practice Set 1: Compute for the Marginal Utility

and Total Utility

Price Quantity

Demanded

Marginal

Utility

Total Utility

15 112 2

10 3

7 45 5

4 6


11/18

Theory of Consumer Behavior

Consumer Choice and Budget ConstraintAssumptions:1. Rational Behavior2. Clear-cut Preferences

3. Subject to Budget Constraint

4. Responds to Price Changes


12/18

Consumer Equilibrium

How is it done? (base on the example)

you will consume additional glasses oficed tea until the last peso of your income

spent on iced tea gives no higher utility thanthe last peso spent on hamburgers

the marginal utility derived from the lastpeso spent on a glass of iced tea is just equalto the marginal utility derived from the lastpeso spent on a piece of hamburger.


13/18

Utility-Maximizing Rule/ Equi-marginal Principle of

Utility Maximization

To maximize satisfaction, the consumershould allocate his or her money income so that thelast dollar spent on each product yields the sameamount of extra marginal) utility. no incentive to alter his or her expenditure pattern.

no opportunity to improve utility


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Now it is possible that several combinations ofgood X and Y will yield the satisfaction of the

equi-marginal condition. But beside the prices

of goods, an additional constraint is theamount of money needed to purchase such

commodities.

I = Px(X) + Py(Y)


15/18

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 30 50

2 39 105

3 45 148

4 50 1785 54 198

6 56 213


16/18

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?


17/18

Time allocation and expected grades

ECONOMICS MATHEMATICS ENGLISHHrs. Grade Margi-

nal

Grade

Hrs. Grade Margi-

nal

Grade

Hrs. Grade Margi-

nal

Grade

0 20 - 0 40 - 0 80 -1 45 25 1 52 12 1 90 10

2 65 20 2 62 10 2 95 5

3 75 10 3 71 9 3 97 2

4 83 8 4 78 7 4 98 1

5 90 7 5 83 5 5 99 1

6 92 2 6 86 3 6 99 0


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ECONOMICS MATHEMATICS ENGLISH

Hrs. Grade Margi-nal

Grade


Grade


Grade

0 20 - 0 40 - 0 80 -

1 45 25 1 52 12 1 90 10

2 65 20 2 62 10 2 95 5

3 75 10 3 71 9 3 97 2

4 83 8 4 78 7 4 98 1

5 90 7 5 83 5 5 99 1

6 92 2 6 86 3 6 99 0

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Theory of Consumer Behavior.pptx