theory of consumer behavior 2010
TRANSCRIPT
-
8/2/2019 Theory of Consumer Behavior 2010
1/35
THEORY OF
CONSUMERBEHAVIOR
-
8/2/2019 Theory of Consumer Behavior 2010
2/35
-
8/2/2019 Theory of Consumer Behavior 2010
3/35
WHAT will I LEARN today?
Understand and apply the marginalutility concept in explaining how a
consumer makes purchase
decision
Learn the step-by-step process infinding optimal units of goods that
are affordable and at the same timewill give the highest satisfaction
Derive a demand curve using theequilibrium price and quantity
demanded
-
8/2/2019 Theory of Consumer Behavior 2010
4/35
I can get no satisfaction
ROLLING STONES
LET US HEAR THEM SING THEN & NOW!
-
8/2/2019 Theory of Consumer Behavior 2010
5/35
UTILITY ???
A set of services provided by these
organizations (public utilities) consumed
by the public(Wikipedia)
-
8/2/2019 Theory of Consumer Behavior 2010
6/35
UTILITY is
Dictionary defines UTILITY asusefulness, service, value, worth or
benefit
In Economics, UTILITY means thesatisfaction, happiness or benefits
that result from the consumption ofa good.
UTILITY is the basis of choice
-
8/2/2019 Theory of Consumer Behavior 2010
7/35
CAN YOUR SATISFACTION
BE MEASURED?
-
8/2/2019 Theory of Consumer Behavior 2010
8/35
The theory faces 2 major
problems
1. It is impossible to MEASURE
satisfaction or utility objectively
-
8/2/2019 Theory of Consumer Behavior 2010
9/35
I CAN GET NO SATISFACTIONBUT I
TRY, AND I TRY
2. It is impossible to COMPARE the
satisfaction or utilities of twopersons or among individuals
VS
-
8/2/2019 Theory of Consumer Behavior 2010
10/35
BUT I TRYNGA EH!
UTIL is a measure of satisfaction orhappiness
UTIL is an artificial construct or
arbitrary or subjective number usedto measure utility or satisfaction
The higher the UTIL the higher
the satisfaction or utility
-
8/2/2019 Theory of Consumer Behavior 2010
11/35
EXAMPLE NAMAN DYAN
What did you eat for breakfast?
++
30 utils 20 utils 50 utils
-
8/2/2019 Theory of Consumer Behavior 2010
12/35
This just shows that one canASSIGN any number of UTIL to a
GOOD consumed.The util is a subjective value thatindicates the persons level of
SATISFACTION derived fromCONSUMING a GOOD.
-
8/2/2019 Theory of Consumer Behavior 2010
13/35
TOTAL VS. MARGINAL UTILITY
TOTAL UTILITY The TOTALsatisfaction a person receives fromconsuming a particular quantity of agood
MARGINAL UTILITY The
ADDITIONAL utility a person receivesfrom consuming an extra unit of aparticular good.
-
8/2/2019 Theory of Consumer Behavior 2010
14/35
LETS COMPUTE UTILS FOR 1 GOOD
CUPS OFCOFFEE
TOTALUTILITY
MARGINALUTILITY
0
1
2
3
4
5
0
10
19
27
34
40
-
10
9
8
7
6
-
8/2/2019 Theory of Consumer Behavior 2010
15/35
TU2 TU1/Q2 Q1= MU1 (extra utilsderived from consuming one more
cup of coffee
CUPS OFCOFFEE
TOTALUTILITY
MARGINALUTILITY
Q10
Q21
2
3
4
5
TU10
TU210
19
27
34
40
-
10- 0=10
19- 10=9
27 19=8
34 27=7
40 34=6
-
8/2/2019 Theory of Consumer Behavior 2010
16/35
LETS FOCUS ON THE MARGINALUTILITY OF COFFEE
MARGINALUTILITY
-
10- 0=10
19- 10=9
27 19=8
34 27=7
40 34=6
THE MARGINAL UTILITYDECREASES AS MORE CUPSOF COFFE IS CONSUMED
OR THE UTILITY ISDIMINISHING ORDECREASING
THIS IS CALLEDLAWOF DIMINISHINGMARGINAL UTILITY
-
8/2/2019 Theory of Consumer Behavior 2010
17/35
TOTAL UTILITY CURVE
50
40
30
20
10
1 23
4
5
-
8/2/2019 Theory of Consumer Behavior 2010
18/35
MARGINAL UTILITY CURVE
10
8
6
4
2
1 23
4
5
-
8/2/2019 Theory of Consumer Behavior 2010
19/35
WHY DEMAND CURVE IS DOWNWARDSLOPING
One of the reasons is the LAW OF DIMINISHINGMARGINAL UTILITY
The inverse relationship of price and quantity
demanded is partly explained by the law ofdiminishing marginal utility.
As one consumes successive units of a specificgood, the less utility it can give. Therefore, inorder to consume more units of a less satisfyinggoods, the price of the good must decrease.
-
8/2/2019 Theory of Consumer Behavior 2010
20/35
DEMAND CURVEonce again!
P
Q
D
P1
P2
Q1 Q2
I will only buy more units ofthe good if you will give me adiscount! Or make the goodcheap so that I can buy large
quantities of the good.
Since the satisfaction I getfrom consuming extra units ofgood decreases, I will only buythe good at a lower price!
-
8/2/2019 Theory of Consumer Behavior 2010
21/35
A Consumer...?
Is rational
Has own preference
Has limitedbudget/resources
Faces goods which
are not free or goodswith prices
-
8/2/2019 Theory of Consumer Behavior 2010
22/35
COMPUTATION NAnow na?Wait lang!
The goal of a consumer is to maximizesatisfaction or utility given the limited
income. Given the limited income and the prices
of goods, the consumer would want toobtain the highest utility possible.
This is accomplished by applying themarginal utility concept.
-
8/2/2019 Theory of Consumer Behavior 2010
23/35
Problem solving:
Consumer has to decide how many ofGood A and Good B to buy
Good A is worth 1 pesos
Good B is worth 2 pesos
Consumer has a total 10 pesos as incometo allocate for the Goods A & B
-
8/2/2019 Theory of Consumer Behavior 2010
24/35
How to determine the
equilibrium quantity of A & B?
1st condition
MU A / Price A = MU B / Price B
2nd condition
INCOME = PriceA X Quantity A + Price B X Quantity B
LAW OF EQUIMARGINAL PRINCIPLE
-
8/2/2019 Theory of Consumer Behavior 2010
25/35
STEPS IN FINDING EQUILIBRIUM UNITS
Compute the Marginal Utility =
(TU2-TU1)/ (Q2- Q1)
Divide MU by the price of the good
Find units of A and B that satisfy the 1stcondition
MU of A/ Price of A = MU of B / Price of B
Select the best combination by applyingthe 2nd condition- budget equation
Y = P1X1 + P2X2
-
8/2/2019 Theory of Consumer Behavior 2010
26/35
STEPS IN FINDING EQUILIBRIUM UNITS
Compute the Marginal Utility= (TU2-TU1)/ (Q2- Q1)
Divide MU by the price of thegood
-
8/2/2019 Theory of Consumer Behavior 2010
27/35
GOOD A which has a price of 1 peso
Good A TOTALUTILITY
MARGINALUTILITY
1
2
3
4
5
6
7
10
18
25
31
36
40
43
10 0=10
18- 10=8
25 18=7
31 25=636 31=5
40 36=4
43 40=3
MU/ P
10/1
8/1
7/1
6/15/1
4/1
3/1
-
8/2/2019 Theory of Consumer Behavior 2010
28/35
GOOD B which has a price of 2pesos
Good A TOTALUTILITY
MARGINALUTILITY
1
2
3
4
5
6
7
24
44
62
78
90
96
100
24 0=24
44- 24=20
62 44=18
78 62=1690 78=12
96 90=6
100 96=4
MU/ P
24/2 = 12
20/2 = 10
18/2 = 9
16/2 = 812/2 = 6
6/2 = 3
4/2 = 2
-
8/2/2019 Theory of Consumer Behavior 2010
29/35
STEPS IN FINDING EQUILIBRIUM UNITS
Find units of A and B thatsatisfy the 1st condition
MU of A/ Price of A
= MU of B / Price of B
-
8/2/2019 Theory of Consumer Behavior 2010
30/35
UTILITY MAXIMIZING COMBINATIONOF GOODS A AND B
GOOD A =1 PESO GOOD B =2 PESOS
Unit MU MU/P Unit MU MU/P
1
2
3
4
56
7
10
8
7
6
5
4
3
10
8
7
6
54
3
1
2
3
4
56
7
24
20
18
16
126
4
12
10
9
8
6
3
2
-
8/2/2019 Theory of Consumer Behavior 2010
31/35
MUA/PA = MUB/PB 3 combinations of Good A and Good B fulfill thisequilibrium condition
MUa/Pa =MUb/Pb
Good A Good B
10 =10 1 2
8 = 8 2 4
6 = 6 4 5
3 = 3 7 6
-
8/2/2019 Theory of Consumer Behavior 2010
32/35
-
8/2/2019 Theory of Consumer Behavior 2010
33/35
All 3 are good but which is best
The one which can use up all yourincome/ affordable
Y = PAGA + PBGB budget equation
1stcomb 10 1(1) + 2(2) under
2nd comb 10=1(2) + 2(4) just enough
3rd comb 10 1(4) + 2(5) over
4th comb 10 1(7) + 2(6) over
-
8/2/2019 Theory of Consumer Behavior 2010
34/35
UTILITY MAXIMIZINGRULE
MU / P of Good A = MU / P of Good B
Given income of the consumer, he will
buy the affordable and at the same timethe combination that will give the highestpossible satisfaction.
-
8/2/2019 Theory of Consumer Behavior 2010
35/35
PRACTICE NAHAVE A BLESSED DAY!