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Consumer and Demand Theory Utility Approach
Consumer and Demand Theory Utility Approach
BMGT 1F
1. Price of the Commodity- there exist an inverse relationship
between price and quantity demanded. When the price of a good
or service increase, it will result to a decrease in the demand for
that good and vice versa.
2. Income of the Consumers- the greater the income of the
consumer, the greater will be their demand for goods.
Normal good refers to goods whose consumption goes up
as the income rises.
Inferior good is a good whose consumption goes down as
the income rises.
3. Consumer's Price Expectation- when consumers expect
higher prices in the future, they will buy more goods to avoid
higher prices.
4. Number of Consumer in the Market- the greater the number of
consumers of a good, the greater the demand for it.
5. Taste and Preferences- a good for which a consumer's taste and
preferences the greater, its demand would be large and its demand
curve will lie at a higher level.
6. Climatic Condition- demand for various goods depends upon the
changes in climate and weather condition.
7. Price of the Related Goods- when the demand for a substitute
decrease, the demand for that good will also decrease.
Substitute good is a good that can be an alternative for a certain
product. The demand for this good has a direct relationship to the
price of a certain product.
Complementary goods are goods that “go together”. The
demand for these goods have inverse relationship to the price of a
certain product.
8. Promotion and Advertisement- successfull advertisement
can increase the demand for a product. Commercials, using a
celebrity and print ads are some of the ways used to promote
a product.
9. Government Policy- economic policy adopted by the
government influences the demand for commodity. (e.g.
government banning the use of cigarettes in public places and
increasing its price)
10. Satisfaction of the Consumers- products that satisfies
consumer's expectation will result to the increase in consumer
demand.
Utility definition
It is a measure of satisfaction an individual gets
from the consumption of the commodities. In other
words, it is a measurement of usefulness that a
consumer obtains from any good. A utility is a
measure of how much one enjoys a movie, favourite
food, or other goods. It varies with the amount of
. desire.
The satisfaction of a consumer is the basis of the
utility function. It measures how much one enjoys when
he or she buys something. A utility is a measure of how
much one enjoys a movie, favorite food, or other goods.
It varies with the amount of desire. One can conclude
the following conclusions
01 02
03 04
For measuring it, it is
It does not analyze the
assumed that utility of
effect of a change in the
consumption of one
price.
good is independent of
that of another.
Ordinal Approach
∆𝑇𝑈
𝑀𝑈 =
∆𝑄
Example: the pleasure of eating the first cookie is much greater
than the pleasure received from eating the tenth or eleventh
cookie in a sitting.
This table shows that total utility will increase at a much slower
rate as marginal utility diminishes with each additional bar.
Notice how the first chocolate bar gives a total utility of 70 but
the next three chocolate bars together increase total utility by
only 18 additional units.
THE LAW OF DIMINISHING MARGINAL UTILITY
2 15 35
3 10 45
4 05 50
5 00 50
6 -0.5 45
Diagram:
Saturation Point - the point where the desire to
consume the same product anymore becomes zero.
Disutility - if you still consume the product after the
saturation point, the total utility starts to fall.
EQUI-MARGINAL PRINCIPLE
MUa/Pa=MUb/Pub
MU-marginal utility
P-price
a&b-respective goods
Product A price is $5
Quantity Total Utility Marginal Utility MUa/Pa
1 100 100/5 = 20
2 170 70/5 = 14
3 220 50/5 = 10
4 250 30/5 = 6
5 260 10/5 = 2
Product B price is $10
Quantity Total Utility Marginal Utility MUb/Pb
1 180 180/10 = 18
2 330 150/10 = 15
3 420 90/10 = 9
4 480 60/10 = 6
5 510 30/10 = 3
Maximizing utility with a budget of $60
𝑴𝑼 𝒐𝒇 𝑷𝒓𝒐𝒅𝒖𝒄𝒕 𝑨 𝑴𝑼 𝒐𝒇 𝑷𝒓𝒐𝒅𝒖𝒄𝒕 𝑩
=
𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝑨 𝑷𝒓𝒊𝒄𝒆 𝒐𝒇 𝑩
Assume you have $16 to spend on dessert. Determine
each of the following:
• The total utility you’d enjoy Ice cream and cake at each
level of consumption.
• The total utility you’d enjoy Ice cream and cake at each
level of consumption.
• The total utility you’d enjoy Ice cream and cake at each
level of consumption.
• The total utility you’d enjoy Ice cream and cake at each
level of consumption.