Consumer Behavior

by:
Romano G. Lavilla, PhD
Law of Diminishing Marginal Utility
Law of diminishing marginal utility
As consumption of a good or
service increases, the marginal
utility obtained from each
additional unit of a good or service
decreases
Total and Marginal Utility from Cups of Caffuccino
Consumed per Day
(measured in utils)
• Utility is the satisfaction one gets from
consuming a good or service
• Not the same as usefulness
• Subjective
• Difficult to quantify
Total Utility and Marginal Utility

•Util is one unit of satisfaction or

pleasure
•Total utility is the total amount of
satisfaction
•Marginal utility is the extra
satisfaction from an additional unit of
the good
•MU = ΔTU/ΔQ
Consumer Choice and Budget Constraint

•Rationalbehavior
•Preferences
•Budget constraint
•Prices
Utility Maximizing Rule

•Consumer equilibrium
•Consumer allocates his or her income so that the
last dollar spent on each product yields the same
amount of extra (marginal) utility
•Algebraically,
The utility-maximizing combination of apples
and oranges obtainable with an income of $10
Income and Substitution Effects

•Income effect
•The impact a price change has on a consumer’s
real income
•Substitution effect
•The impact a price change on a product’s
relative expensiveness
Applications and Extensions
New products
iPad
Diamond-water paradox
Opportunity cost and time
Medical care purchases
Cash and noncash gifts
Indifference Curve Analysis

Alternative to theory of utility

maximization
Difficult to measure utility
Use rankings or order of preference
for products
Takes into account the consumer’s
budget
Derive a demand curve
The Budget Line
Budget Line
Combinations of two products a
consumer can purchase with their
money income
Slope
Ratio of the price of B to the price
of A
Location varies with income changes
Location varies with price changes
Indifference Curves
Indifference Curve
Combinations of two products that yield
the same amount of total utility
The consumer is indifferent as to which
combination to purchase
Downsloping
Convex to the origin
Reflects the Marginal Rate of Substitution
The Indifference Map
Indifference map
Series of indifference curves where
each curve reflects different amounts
of utility
Each successive curve outward
reflects a higher level of utility
Equilibrium at Tangency

 The consumer’s equilibrium position

 Indifference curve is tangent to the
budget line
 Utility is maximized
 MRS equals the ratio of the price of B
to the price of A
Reference
McConnell, C., Brue, S. & Flynn, S. (2012) Economics:
 Principles, Problems and Policies (Global Edition, 19th
 edition) Boston: McGraw-Hill