Consumer behavior and

Utility Maximization
Microeconomics
CONSUMER – is the one who demands and
consumes goods and services.
▪ King in the capitalist and free market economy.
▪ Ultimate purchasers of goods and services.
▪ Ultimate purchasers of goods and services.
▪ Consumer Sovereignty

PRODUCER – are the passive agents.

▪ Obey the wishes and desires and the needs and
wants of consumers.
What does consumer want?
⚫ People choose those goods
and services they value
most highly.
⚫ Maximize the satisfaction
give the limited
budget/income
GOODS and SERVICES

• Goods – refer to anything that

provides satisfaction to the needs,
wants and desires of the consumers.
• Services - are intangible economic
activities.
Consumer Goods – goods that yield satisfaction directly to
any consumer.

Essential or Necessity Goods VS. Luxury Goods

• Essential or Necessity Goods - are goods that satisfy
the basic needs of man.
• Luxury Goods – are those which men may do without, but
which are used to contribute to his comfort and wellbeing.

Economic and Free Good

• Economic Goods - are both useful and scarce. It has
value attached to it and a price has to be paid for its use.
• Free Goods – are those goods which are abundant that
there is enough of it to satisfy everyone's need without
anybody paying for it.
 Tastes and Preferences

❑ Consumers have various tastes and preferences.

❑ Tastes and Preferences are determined by age,
income, education, gender, occupation, customs
and traditions as well as culture.
❑ Brand – the name, term or symbol to a product by
a supplier in order to distinguish his offering from
that of similar products supplied by competitors.
MASLOW’s HIERARCHY of NEEDS

Maslow’s Hierarchy of Needs – identifies the basic priorities

of every consumer
The Economics of Satisfaction

The economics can explain the behavior of consumers in

order to attain maximum level of satisfaction on the goods
and services that they generally consume.
Utility

⚫ It means Satisfaction or
PLEASURE
⚫ It refers to how consumers rank
different goods and services.
⚫ How rational consumers divide
limited resources.
Hypothetical Demand Schedule for SIOPAO

PRICE (P) QUANTITY DEMANDED (QD)

15.00 1

12.75 2

10.50 3

8.25 4

UTILITY THEORY – it explain how satisfaction or utility as

consumers decline when we try to consume more and more
of the same good at particular point in time.
 Maximizing Utility
⚫ Preferences
⚫ A household’s preferences determine the benefits
or satisfaction a person receives consuming a good
or service.
⚫ The benefit or satisfaction from consuming a good or
service is called utility.
⚫ Total Utility
⚫ Total utility is the total benefit a person gets from
the consumption of goods. Generally, more
consumption gives more utility.
Maximizing Utility
⚫ Table 8.1 provides an
example of total utility
schedule.
⚫ Total utility from a
good increases as the
quantity of the good
increases.
⚫ For example, as the
number of movies seen
in a month increases,
total utility from movies
increases.
 Maximizing Utility
⚫ Marginal Utility
⚫ Marginal utility is the change in total utility that results
from a one-unit increase in the quantity of a good
consumed.
⚫ As the quantity consumed of a good increases, the
marginal utility from consuming it decreases.
⚫ We call this decrease in marginal utility as the quantity
of the good consumed increases the principle of
diminishing marginal utility.
Hypothetical Utility Schedule for SIOPAO

Unit Purchased Total Utility Margin Utility

1 40 40

2 90 50

3 170 80 20
100
4 270 100
(20)
80
5 350 80
 MATHEMATICAL DERIVATION OF MARGINAL
UTILITY
MARGINAL UTILITY is simply the change in total utility
divided by the change in quantity.
TU
MU = Q

TU2 – TU1
MU = Q2-Q1

MU = 170 – 90
3–2

MU = 80
Activity Units
consumed
Total Marginal
Utilit Utility
y
0 0 -
⚫ Complete the following 1 8 8
table. 2 10
18
3 25 7
4 30 5
5 33 3
6 34 1
Law of Diminishing Marginal
Returns.
⚫ All other things remaining constant, if only one input is increased
a point will be reached where each additional input produces
less output than the previous input.
⚫ Law of Diminishing Returns: After a certain point, when
additional units of a variable input are added to a fixed input, the
marginal product of each additional variable input is less than the
previous input.
⚫ Diminishing returns always apply in the short run, and in the
short run every firm will face diminishing returns. This means that
every firm finds it progressively more difficult to increase its
output as it approaches capacity production.
Shape of TU - Positive slope (in the
decision range)
•Consumer only purchases a good if
gets some positive amount of utility
Shape of MU - Eventually downward sloping
•Law of diminishing marginal utility
Maximizing Utility
⚫ Table 8.1 provides
an example of
marginal utility
schedule.
⚫ Marginal utility from a
good decreases as the
quantity of the good
increases.
⚫ For example, as the
number of movies seen
in a month increases,
marginal utility from
movies decreases.
Maximizing Utility
⚫ Figure 8.1(a) shows a
total utility curve for
soda.
⚫ Total utility increases
with the consumption of
a soda increases.
Maximizing Utility
⚫ Figure 8.1(b) illustrates
diminishing marginal
utility.
⚫ As the quantity of soda
increases, the marginal
utility from soda
diminishes.
 Maximizing Utility
⚫ The key assumption of marginal utility theory is that the
household chooses the consumption possibility that
maximizes total utility.
⚫ The Utility-Maximizing Choice
⚫ We can find the utility-maximizing choice by looking at
the total utility that arises from each affordable
combination.
⚫ The utility-maximizing combination is called a
consumer equilibrium.
 Maximizing Utility

⚫ Choosing at the Margin

⚫ A consumer’s total utility is maximized by following the
rule:
Spend all available income.
Equalize the marginal utility per dollar for all
goods.
⚫ The marginal utility per dollar is the marginal utility
from a good divided by its price.
Substitution Effect

⚫ If the price of coffee goes up while other

prices do not change, the coffee has
become relatively more expensive. when
coffee has becomes more expensive
beverages, less coffee or more tea or
cola will be bought.
⚫ When price of good rises, consumers will
tend to substitute other goods.
Income Effect

⚫ When price of any good rises it tends to

decrease real income and causes
income effect.
⚫ Real income means the actual amount
of goods and services that your money
income can buy.
CONSUMER SURPLUS
CONSUMER SURPLUS – is a measure of the welfare we
gain from the exchange of goods. Consumer surplus is the
difference between the total amount that we actually pay
for that good or service.
Example: You are interested in buying a new pants. You
went to the mall and look for the pants that you really
wanted. Your budget is P3,000. You found the pants you
really liked the most which cost P2,500. You bought the
pants. What is your consumer surplus?

Consumer surplus = P500 the difference between what you

pay and what you have been willing to pay for them.
INDIFFERENCE CURVE
Indifference curve – is a line that shows
combinations of goods among which a consumer is
indifferent.
Hypothetical Table for Consumption of Meat and Fish
COMBINATION MEAT (kg) PRICE of MEAT FISH (kg) Price of Fish (P)
(P)
A 5 500 1 100

B 4 400 2 200

C 3 300 3 300

D 2 200 4 400

E 1 100 5 500
BUDGET LINE
BUDGET LINE or CONSUMPTION POSSIBILTY LINE-
shows the various combinations of two products that
can be purchased by the consumer with his income,
given the prices of the products. A consumer given his
fixed budget must spend wisely and efficiently in
order to maximize his satisfaction.
Hypothetical Table for Budget Line
Unit A (Beans Price A Unit B (Onions Price B Budget
in kg) in kg)
5 P125 1 P25 P150
4 100 2 50 150
3 75 3 75 150
2 50 4 100 150
1 25 5 125 150
Thank
You!