theory of consumer behavior.pptx
TRANSCRIPT
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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.
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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.
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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.)
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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.
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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
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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.
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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
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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
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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
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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
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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.
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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)
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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
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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?
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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
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