1st socsci economy
DESCRIPTION
socsciTRANSCRIPT
THEORIES OF CONSUMER BEHAVIOR
THEORIES OF CONSUMER BEHAVIOR
UTILITY THEORYINDIFFERENCE THEORY Vilfredo Pareto Described thru
Consumer’s preferenceof “various combinations of goods and services” based on nature NOT on total utility and marginal utility
I.
William Stanley JevonsAnalyze in total utility (TU) and marginal utility (MU)“utils “ is the unit of measureConsumer satisfaction can be measured thru TU and MU
II. UTILITY THEORY
Consumer’s satisfaction is measured using UTILS
A. Utility Schedule for Siomai
Piece/ UnitTotal Utility
(TU)Marginal
UtilityMU=ΔTU/ ΔQ
01
014
014
23
2533
118
45
3841
53
67
4343
20
89
4138
-2-3
1011
3325
-5-8
1213
140
-11-14
0 2 4 6 8 10 12 1405
101520253035404550
Y-Values
Y-Values
B. Plot the value on the X and Y axis
0 2 4 6 8 10 12 1405
101520253035404550
Y-Values
Y-Values
C. TOTAL UTILITY CURVE Connect the points. Then, observe the shape of the graph.
D. Law of Diminishing Marginal Utility
satisfaction derived in goods decrease as additional number of the same good is utilized
MU = Δ TU (TU2- TU1) Δ Q (Q2- Q1)
MARGINAL UTILITY (MU) CURVE
0 2 4 6 8 10 12 14
-20-15-10-505
101520
Y-Values
Y-Values
III. INDIFFERENCE PREFERENCE THEORY
> Modern approach in understanding consumer behavior
> Analysis is based on consumer preferences of various combinations of goods and services depending on its nature
A. INDIFFERENCE SCHEDULE OF FOOD & CLOTHING
FOOD(X)
AND CLOTHING(Y)
350 - 40230 - 80150 - 12090 - 16060 - 20040 - 24030 - 280
0 50 1001502002503003504000
50100150200250300
Y-Values
Y-Values
B. Plot the Indifference Schedule
0 50 1001502002503003504000
50100150200250300
Y-Values
Y-Values
C. Indifference Curve (Single Curve)
Indifference Curve = locus of points wherein each point represents a combination of goods and services that will give equal level of satisfaction to a consumer
0 50 1001502002503003504000
50100150200250300
Y-Values
Y-Values
D. Indifference Map
E. RULE in reading the IC’sThe farther the IC from the
point of origin OR as we move upward from the origin going to the right the higher is the level of satisfaction.
Thus, farther curves are more preferred .
F. Important Properties of IC1) IC slopes downward (negative slope), therefore,
consumer adds 1 unit of food, she/he needs to deduct
1 unit of clothing.REASON: budget constraint
2) IC is convex to the point of origin, therefore, curve becomes flatter as it goes down from point A to G. Hence, slope decreases and it is said to be convex.
3) IC does NOT meet or intersect at any point.
4) IC reflects preferred combinations of goods/ services, therefore, IC moves to the right to show higher levels of utility.
G. MARGINAL RATE OF SUBSTITUTION
FOOD(Y)
CLOTHING MRS(X)
350 40 0230 80 3150 120 290 160 1.560 200 .7540 240 .530 280 .25
MRS = Δ Product (X) Δ Product (Y)
KEY WORDS:budget constraint = what consumers can afford to buy based on her/his cash on hand preference = what they WANT to consume is what they buy
Marginal Rate of SubstitutionMRS = Δ X2- X1 Δ Y2- Y1