Chapter 3

HOUSEHOLD BEHAVIOR
AND CONSUMER CHOICE

UNIT 3
Prepared by:
Rae Marie G. Leong-on & PS Charity Alibogha
Department of Business Administration
Central Philippine University
Prepared by:
THE NATURE OF CONSUMERS’

PREFERENCES
· One of the most important determinants of a
consumer’s behavior is his or her preference.
· Because of the consumers’ diverse
preferences, the kinds of commodities being
purchased also vary.
Prepared by:

TWO BASIC ASSUMPTIONS ABOUT
THE NATURE OF CONSUMERS’
TASTES
1. We assume that consumers can decide
whether they prefer the first market basket to
the second, whether they prefer the second
to the first, or whether they are indifferent
between them.
Prepared by:
TWO BASIC ASSUMPTIONS ABOUT

THE NATURE OF CONSUMERS’ TASTES
2 We assume that the consumer always prefers
more of a commodity to less.
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DETERMINANTS OF CONSUMER
TASTES AND PREFERENCES
1. EXPERIENCE
2. AGE
3. EDUCATION
4. DEMONSTRATION EFFECTS
5. ADVERTISING
6. PRICES OF GOODS
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THE THEORY OF CONSUMER CHOICE
· allows us to predict how the consumer

responds to changes in the market condition
he faces
· has four elements that describe the consumer
and his market environment
Prepared by:
FOUR ELEMENTS THAT DESCRIBE THE

CONSUMER AND HIS MARKET
ENVIRONMENT
1. The consumer accepts the prices at which he
can buy any amount of the existing goods and
services.
2. The consumer has a given income available
for spending
Prepared by:

FOUR ELEMENTS THAT DESCRIBE THE
CONSUMER AND HIS MARKET
ENVIRONMENT
3. The consumer has tastes that allow him to
evaluate or rank alternative combinations, or
baskets of goods by the satisfaction they yield.
The consumer prefers more of any goods to
less.
4. The consumer chooses his consumption
basket that will maximize satisfaction.
Prepared by:

UTILITY CONCEPTS AND
MEASUREMENTS
· The concept of utility was developed by
economists to help analyze the nature of
demands in relation to consumer’s
satisfaction.
· Utility is an index of satisfaction.
· Utils measure the level of satisfaction derived
by a consumer from using or consuming a
particular good.
– “happiness barometer” Prepared by:

The Law of Diminishing Marginal
Utility
“as a consumer uses up a good or service, he
tends to get less and less satisfied with it
through time”
· the greatest satisfaction is experienced by

consuming the first quantity of the said good
· one of the by - product of consumer behavior
theory
Prepared by:

Utility
· Total Utility – overall happiness derived by a
consumer with regard to his consumption of a
product
· Marginal Utility – amount of additional utility
received in every consumption of an
additional unit of good
Prepared by:

Utility
· Marginal Utility
– the change in utility as we consume an
additional unit of a product
- total utility changes relative to the
change in marginal utility
MU = change in TU
change in Q
Prepared by:

Example
· A girl craves for dumplings.
Quantity Total Utility Marginal Utility
1 10 utils -
2 19 utils 9
3 26 utils 7
4 30 utils 4
5 30 utils 0
6 26 utils -4
7 19 utils -7
Prepared by:

Utility
· Total Utility
- increases as more and more units of the
product are consumed
- when the marginal utility is less than 0,
total utility decreases
Prepared by:

APPROACHES OF UTILITY
MEASUREMENT
1. Cardinal Utility Approach
2. Ordinal Utility Approach

APPROACHES TO UTILITY
MEASUREMENT
1. CARDINAL UTILITY APPROACH
-involves assigning value to every good or a
combination of goods consumed representing
the degree of utility or satisfaction associated
with it.
For example, you are asked to choose between
egg pie and buko pie. You say you derive 100
utils from eating a slice of egg pie and only 50
utils from eating a slice of buko pie. By the
theory of cardinal utility approach, you would
prefer egg pie over buko pie because the former
gives you twice as many utils . Prepared by:

APPROACHES TO UTILITY
MEASUREMENT
2. ORDINAL UTILITY APPROACH
- merely describes preference such as which of
X and Y you prefer more.
Prepared by:

Other Methods of Explaining
Consumer Behavior
· Indifference Curve
· Budget Line
Prepared by:

Consumer Behavior (2)
1. Indifference Curve
– is an approach to the study of consumer
behavior that requires no numerical measure of
utility.
– a curve that shows all combinations of goods
that provide the consumer the same satisfaction,
or the same utility.
· Since each of the alternative bundles of goods yield
the same level of utility, the consumer is indifferent
about which combination is actually consumed.
Prepared by:

Characteristics of Indifference Curve
! !Downward sloping: means that a consumer has to

give up units of good X in order for him to acquire
additional unit of good Y.
! !Non-intersecting: all possible combinations of goods X
and Y will yield the same level of utility or satisfaction
for the consumer
! !Convex to the origin: reflects the relative
substitutability of goods X and Y; it also implies that
the rate at which Y can be traded for constant
additions of X diminishes as more and more of X is
consumed and Y becomes “scarcer.”
Prepared by:
INDIFFERENCE CURVE
Prepared by:
Rae Marie G. Leong-on & PS

Charity Alibogha
Department of Business
Administration
SAMPLE PROBLEM
· Macoy has 1 unit of food and 12 units of
clothing.
Prepared by:

· When asked further, Macoy answered that the
following combinations of food and clothing
will retain his satisfaction level:
Combination Food Clothing
A 1 12
B 2 6
C 3 4
D 4 3
Prepared by:

Macoy’s Indifference Curve
Prepared by:

INDIFFERENCE CURVE
· MARGINAL RATE OF SUBSTITUTION (MRS)
- is the amount of one good or service that a
consumer is just willing to give up to obtain an
additional unit of another .
- It refers to the slope of the indifference curve.
Prepared by:

INDIFFERENCE CURVE
· Indifference Map
– a set of indifference curves which represent
various levels of satisfaction or utility
– consumer’s preference function
– it is the graphical representation of a consumer’s
tastes.
– “An indifference curve that lies above and to the
right of another indicates a higher level of utility.”
Prepared by:

INDIFFERENCE CURVE
· Indifference Map
U= !(x, y)
Where:
U - represents levels of preference
( expressed in ordinal terms only)
!- is read “is a function”
X – is one good
Y – is another good
Prepared by:

INDIFFERENCE MAP
Any combination of
two goods (X & Y)
on indifference
curve I2 (i.e., F, G, H,
I, and J) represents a
higher level of
satisfaction than any
combination of
goods X and Y on
indifference curve I1
(i.e., A, B, C, D, and
E).
Prepared by:

Consumer Behavior
2. Budget Line
- represents all combinations of goods and
services available to the consumer when all of
the consumer’s income (purchasing power) is
being utilized given his level of income and the
prices of the goods or services.
· In other words, the consumer’s purchasing power and
the prices of the goods and services he wants to buy
determine his budget line.
Prepared by:

BUDGET LINE
· Purchasing power /Income
– the quantity of goods and/or services that can be
bought with a given level of income and prices of the
commodities.
– The budget line can be expressed algebraically as,
I = (Px !X) + ( Py !Y )
where: I - is income
X – is one commodity
Y – is the other commodity
P – is the price of X or Y
Prepared by:

BUDGET LINE
· Emily has Php 50.00 to buy cheese curls.
Cheepee costs Php 5.00 while Mr. Chips costs
Php 10.00. Based on the Budget Line
Schedule, create a graphical representation of
Emily’s Budget Line.
Prepared by:

EMILY’S BUDGET LINE
SCHEDULE
Combination Number of Number of Mr. Budget
Cheepee Chips Allocation
(@ Php 5.00/pack) (@ Php (Income)
10.00/pack)
A 10 0 10(5) + 0(10) =
50
B 8 1 8(5) + 1(10) = 50
C 6 2 6(5) + 2(10) = 50
D 4 3 4(5) + 3(10) = 50
E 2 4 2(5) + 4(10) = 50
Prepared by:

EMILY’S BUDGET LINE
12
Cheepee
A
10
B
8 C
6 D
4 E
2
0
0 1 2 3 4 5
Mr. Chips
Prepared by:

CAUSES OF SHIFTS IN THE
BUDGETLINE
1. Changes in a consumer’s income - an
increase in money income will shift the
budget line to the right; and a decrease in
money income will move it to the left
2. Changes in the prices of the goods and
services available - a decline in the prices of
both products ( which is the equivalent of an
income increase), will shift the curve to the
right.
Prepared by:

SHIFTED BUDGET LINE
Prepared by:
INCOME EFFECT AND

SUBSTITUTION
EFFECT ON CHANGES IN
PRICE
· The consumption of goods and services is
constrained by the income of the consumer
and the price of the commodity .
· An INCOME EFFECT happens when the
budget
line shifted to the RIGHT because of an
INCREASE in the consumer’s budget or from a
DECREASE in the prices of goods X and Y.

INCOME EFFECT
· For example, if a student is given a regular daily
allowance of P25.00 for every snack, what he can
afford to buy is a sandwich (which costs P15) and
a soft drink (which is P10 per bottle ).
During payday, however, he is given double
than his regular allowance, which means that he
can now afford to buy sandwiches (Php15 ) and
drinks (P10) good for two. Therefore, quantity
demanded for sandwich and soft drink has
increased.
Prepared by:

SUBSTITUTION EFFECT
· When the price of one good increase, and the
income and prices of other goods remain the
same, it now becomes relatively more
expensive than the rest of the goods in the
consumer’s basket .
· Thus, the consumer tend to shift to lower
priced goods for the good whose price has
increased in order to maintain his utility level.
Prepared by:

SUBSTITUTION EFFECT
· For example, if the price of soft drink
increased, by P12, the consumer would opt
not to buy soft drink but look for other drinks
that is price lower than soft drinks, say an
Apple Plus juice, which costs P10 only. In this
case, the demand for soft drink would
decrease since the consumer has substituted
it with juice as a result of price increase for
soft drink.
Prepared by:

True or False
Identify if the statement is TRUE and say if it is FALSE otherwise.

Change the words or phrases that make the statements wrong.
1.Marginal Utility can be attained when the change in Total

Utility is divided by the change in Quantity.
2.The concept of scarcity was developed by economists to

help analyze the nature of demands in relation to consumer’s
satisfaction.
3.The Theory of Consumer Choice allows us to predict how

the consumer responds to changes in the market condition he
faces.
True or False
4.One of the by-products of consumer behavior theory

is the nature of consumer’s preferences.
5. Marginal utility is the amount of additional utility

received in every consumption of an additional unit of
good.
6.Util is the index of dissatisfaction.

True or False
7.Indifference curve is always non-intersecting, upward-

sloping and convexes to the origin.
8.There are two reasons as to why budget lines shift: the

changes in the prices of goods and services and the changes
in consumer’s mood.
9.An income effect happens when the budget line shifted to

the RIGHT because of an INCREASE in the consumer’s
budget or from a DECREASE in the prices of goods X and Y.
True or False
10.Because of consumers’ diverse preferences, the

kinds of commodities being purchased also vary.

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HOUSEHOLD BEHAVIOR

AND CONSUMER CHOICE

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

THE NATURE OF CONSUMERS’

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

TWO BASIC ASSUMPTIONS ABOUT

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

· allows us to predict how the consumer

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

FOUR ELEMENTS THAT DESCRIBE THE

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

· the greatest satisfaction is experienced by

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

Rae Marie G. Leong-on & PS Charity Alibogha

Department of Business Administration

Central Philippine University

! !Downward sloping: means that a consumer has to

Rae Marie G. Leong-on & PS Charity Alibogha