1st socsci economy

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