ESSENTIALS OF

CONSUMER
BEHAVIOR
PREPARED BY: MOMPAR, JOJO
ROLLORATA, MARY KRIS MONTERO, EUGENE
BELVESTRE, LEONISA ELIOT, FRITZIE
COLANTRO, RICHELL NITZ SIMARINGA
CONSUMER’S RATIONAL BEHAVIOR- People will make different choices because their
circumstances and available information differ. But rational decisions are made in order
to achieve the greatest satisfaction or maximum fulfillment of their goals. Thus, consumers
buy to the greatest benefit or satisfaction from the goods and services that their incomes
allow them to buy.

UTILITY- is want-satisfying power. The utility of a good or services is the satisfaction one
gets from consuming it.

It has three properties:

• It is not synonymous to functionality
• It is a subjective notion
• It is difficult to quantity
As a convenient pedagogical device, however, we assume to measure satisfaction by using
“util” as a mythical unit to measure satisfaction.

UTIL (s) - an imaginary unit of measurement used in quantifying satisfaction.

Marginal - refers to either the last unit that has been added or the next unit that may be
added to the previous; known also as additional or extra.

Marginal Utility (MU) - the additional satisfaction gained by the consumption or use of one
more unit of the same good or service. Numerically, this is obtained by dividing change in TU
by change in quantity. (^TU/^Q)
 LAW OF DIMINISHING MARGINAL UTILITY
- stating that as the quantity of good consumed increases, eventually each
additional unit of the good provides less additional utility– that is, marginal utility
decreases. Each subsequent unit of a good is valued less than the previous one. -
Means that the value of a good, the extra derived from good, declines as more
of the good is consumed. If the satisfaction obtained from a good declines, then
buyers are willing to pay for a lower price, hence demand price is inversely
related to quantity demanded, which is the law of demand.
 EXHIBIT 1 (1) (2) (3)
Units of Good X Total Utility (utils) Marginal Utility (utils)

0 0 -
(a) 1 10 10
2 19 9
3 27 8
(b) 4 34 7 (c)
5 40 6

total utility (utils) marginal Utility (utils)

12
45
TOTAL UTILITY (UTILS)

40 40
10 10
35 34

MARGINAL UTILITY (UTILS)

9
30
25 27 8 8
7
20 19 6 6
15
10 10 4
5
0 0 2
0 1 2 3 4 5
QUANTITY IF GOOD X 0 0
0 1 2 3 4 5
total utility (utils) QUANTITY OF GOOD X
Exhibit 1
Total Utility, Marginal Utility, and the Law of Diminishing Marginal Utility

TU = total utility and MU = marginal utility. (a) Both total utility and marginal

utility are expressed in utils. Marginal utility is the change in total utility divided
by the change in the quantity consumed of the good, MU = ∆TU/∆Q. (b) Total
utility curve. (c) Marginal utility curve. Togerher, (b) and (c) demonstrate that
total utility can increase (b) as marginal utility decrease (c).
The Law of Demand
-the demand price that a buyer is willing and able to pay for
a good depends on the satisfaction (utility) generated from
consumption. A buyer is willing to pay a higher demand price
if utility diminishes as the quantity of a good is consumed
increases (the law of diminishing marginal utility), buyers are
willing and able to pay lower prices for larger quantities (the
law of demand). Hence, the law of demand exists because
the less satisfaction is received for larger quantities.
 CONSUMER EQUILIBRIUM AND DEMAND
Equating Marginal Utilities per Dollar
Suppose there are only two goods in the worlds, apples and oranges. At present, a consumer
is spending his entire income consuming 10 apples and 10 oranges a week. For a particular
week, the marginal utility (MU) and price (P) of each are at follows:
MU oranges = 30 utils
MU apples = 20 utils
P oranges = $1
P apples = $1
 THE INDIFFERENCE CURVE
Indifference Curve- a curve composed of infinite points, each representing a combination of
two given goods which yield the same level of satisfaction. A series of non-intersecting
indifference curve is called an indifference map. The word “indifference” means showing no
bias or neutral.
AN INDIFFERENCE SCHEDULE
COMBINATIONS KILOS OF PRODUCT A KILOS OF PRODUCT B

M 50 10

A 40 20

B 30 30

E 20 40

L 10 50
 INDIFFERENCE CURVE
60

A consumer’s Indifference
50 Curve: every point on an
indifference curve indicates
40 a combination of two
products which provides
30 KILOS OF PRODUCT A same level of satisfaction.
KILOS OF PRODUCT B

20

10

0
1 2 3 4 5
Marginal Rate of Substitution (MRS) – is the slope of an indifference curve. It shows the
rate, at the margin, at which the consumer will substitute one good for the other to remain
equally satisfied.
MU of “X” Mux
MU of “Y” or Muy
Budget Constraint- the limits imposed on household choices by income, wealth, and product
prices.
Budget Line- shows the various affordable combinations of two products which can be
bought given the prices of the goods and money income budget.
Budget line or consumption-possibility line – the various combinations of two products
which can be purchased by the consumer with his income, given the prices of the products.
Our ability to satisfy our human wants depends on our budget or purchasing power. If we
have more money to spend, then we can buy more goods and services. This means we
attain higher level of utility.
Equilibrium of the consumer is the combination of two goods which provides maximum
satisfaction to the consumer. This also the point where the budget line is tangent to the
indifference curve. The consumer cannot buy combination above the budget line although this
has more utility. He can acquire any combination below the budget line, but it has lower
utility.