ECON 102- REVIEWER leveled the term satisfaction as

utility.
Total Utility
Production Possibility Curve
- It is the amount of utility
- Is a graph that depicts the trade-off
(satisfaction); a consumer gets by
between any two items produced.
consuming all the units of a
- Also known as Transformation
commodity.
Curve or Production Frontier
- Shows the maximums feasible Marginal Utility
quantities of two or more goods that
- Is defined as the change in the total
can be produced with the resources
utility due to a unit change in the
available.
consumption of a commodity per
- It indicates the opportunity cost of
unit of time.
increasing one item’s production in
- It can also be defined as the addition
terms of the units of the other
made to the total utility by
forgone.
consuming an additional unit of a
Opportunity Cost commodity.
- Is a term which means the cost of Marginal Utility can be expressed as:
something in terms of an opportunity
∆ TU
foregone (and the benefits that could MU =
∆Q
be received from that opportunity) or
the most valuable foregone Law of Diminishing Marginal Utility
alternative.
- States that additional satisfaction a
- In other words, the opportunity cost
person derives by consuming a
of a given commodity is the next best
commodity goes on declining as he
alternative cost or transfer costs.
consumes more and more of that
Consumer Behavior commodity.
- It is assumed that consumers are Indifference Curve
rational. Given his money income
- A graphical representation of a
and the prices of commodities, a
combined products that gives similar
consumer always tries to maximize
kind of satisfaction to a consumer
its satisfaction. That is, to get the
thereby making them indifferent.
maximum welfare (state of well-
- Shows combination of two goods in
being) by spending the given money
various quantities that provides equal
on various commodities.
satisfaction (utility) to individual.
Utility
Properties of Indifference Curve
- Is defined as the power of a
First- they are downward sloping
commodity or service to satisfy a
human want. Economists have
Second- higher indifference curve are different options. The
preferred to lower ones consumer can always
compare two sets of bundles
Third- they cannot intersect
and rank them.
Fourth- they are convex
Budget Line (BL)
MODEL OF DECISION MAKING
- Shows combination of two goods a
The consumer can use the model of decision
consumer is able to consume, given a
making when ranking
budget constraint.
- Shows all different combinations of Preferences- what an individual want
the two commodities that a consumer
Budget Constraint- the capability to pay
can purchase, given his money
income and the price of the two Decision- which product will give the
commodities. consumer the highest satisfaction in
purchasing a product.

INTRODUCTION TO CONSUMER
BEHAVIOR 2. Transitivity
o Transitivity is arguably the
Consumer Behavior- is the study of
individuals and organizations and how they most fundamental axiom of
select and use products and services. rational choice
o The assumption of transitive
Factors Influencing Consumer Behavior preferences is the assumption
that if any of the three
Psychological- motivation, perception,
outcomes a, b, and c, where if
learning, attitudes, and beliefs
bundle a is preferred over
Social- family, reference groups, roles and bundle b and bundle b is
status preferred over bundle c, then
bundle a is preferred than
Cultural- culture, subculture, social class
bundle c.
Personal- age, income, occupation, lifestyle, o In this assumption,
liquid assets consumers are able to order
their preferences in a logical
Economic- personal income, family income,
way. That is, if x > y, then y
income expectations, consumer credits,
> z, therefore x > z.
savings.
When does transitivity fail?
Three (3) Assumptions of Rational
Preferences Perceptible differences
1. Completeness Example: Choose between/among very
o It is when a consumer is similar shades of gray for painting the room.
making a choice between two
Framing Problem (or cognitive bias)
People react to a particular choice in
different ways depending on how it is being
presented.
3. Non-satiation
o More of a commodity is
preferred to less.
o Household can always do a
little bit better by consuming
more of a commodity
o Such a good commodity is
termed a good (or desirable)
commodity and as opposed to
a bad (or undesirable)
commodity.
Diminishing Marginal rate of substitution
- Is an economic model that illustrates
how consumers make trade-offs
among competing products.
Calculation of MRS
loss of Y
MRS xy = =¿
gainof X
Law of Diminishing MRS
According to Ferguson “the law of
diminishing marginal rate of substitution
states that as X is substituted for Y so as to
leave the consumer on the same indifference
curve, the marginal rate of substitution of X
for Y diminishes.
“The law of diminishing marginal utility
states that a consumer consumes more and
more units of a specific commodity, the
utility from the successive unit goes on
diminishing”
Why is DMRS more realistic than DMU?
(1) Measurement of Utility
(2) Interdependent commodities
involved
(3) Marginal utility of money
CONSUMER BEHAVIOR
- Situation wherein a consumer gets
maximum satisfaction from the
purchase of commodity with his
given income and he has no tendency
to make any change in his existing
purchase.
Two approaches to explain consumer
equilibrium
1. Utility approach (cardinal
measurement of utility)
2. Indifference curve approach (ordinal)
Tangency/Tangent: At that point of
tangency, the marginal rate of substitution
(MRS) between the two goods is equal to
the ratio of prices of two goods.
Equilibrium: a situation that will persist
because the individual has no incentive to
change his or her behavior.
Interior Solution
- An equilibrium that contains some
amount of each good
- If a tangency point is reached
between the indifference curve and
budget line, this is an interior
solution.
Marginal Rate of Substitution
- The amount at which consumer is
willing to substitute one good for the
 others; the slope of the budget
constraint is the rate at which she is
able to trade one good for the other
(disequilibrium).
- The negative of the slope of the
indifference curve is the marginal
rate of substitution
- The negative slope of the budget line
is Px/Py
Corner Solution
- An equilibrium bundle in which the
consumption of some commodity is
zero
- The equilibrium occurs at the corner
formed by the budget constraint and
the axis.
- Maximized situation whereby
consumer is unwilling to purchase
one of the commodities available
- The indifference curve will never be
tangent to the budget line/constraint
Consumer Equilibrium: In case of one
commodity
- Can be explained on the basis of law
of diminishing marginal utility
Consumer Equilibrium: In case of two
commodities
- Law of equi-marginal or equity
marginal is applied. Law of equi-
marginal utility states that a
consumer should spend his limited
income to purchase different
commodities in such a way that the
last income spent on each
commodity provide equal marginal
utility in order to attain maximum
satisfaction.
COMPARATIVE STATICS AND
DEMAND
Comparative Static
- the process of comparing two
equilibria.
- The analysis of comparative statics is
important because it leads to testable
prediction of how people will behave
under new circumstances.
Price and Income changes
- The change in the price of a good
can change the quantity that
consumers will demand of that good
and related goods, based on how the
price change affect their income.
Remember: the impact of the price depends
on the individual equilibrium bundle
depends on his/her taste.
A change in the price of a commodity
change the position of the budget constraint,
which changes the consumers opportunities.
Derivation of Demand Curve
Demand curve- summarize all the
information on how the behavior of price-
taking consumer changes when price varies,
ceteris paribus.
Cross Price Changes
Cross price effect- the impact of a change
in the price of one good on the quality
demanded another good.
Related Goods are either substitute or
complements
Substitute: two goods that satisfy similar
wants. An increase in the price of one good
lean an increase in the quantity demanded of
substitute. (ceteris paribus)
Complements: two goods that tends to used
together. An increase in the price of one
goods leads to a decrease in the quantity
demanded of a complement/ (ceteris
paribus)
Unrelated good: an increase in the price of
one good has no impact on the quantity
demanded of the others/ (ceteris paribus)
Demand Curve and Cross Price Effects
A change in the price of good can
affect for a different good.
Substitute
Increase in price of substitute-- increase in
demand
Decrease in price of a substitute- decrease
in demand
Complement
Increase in price of a complement
decrease demand
Decrease in price of a complement 
increase demand
Change in demand- a shift of the entire
demand schedule
Change in quantity demanded- a
movement along a given demand schedule.
Income Changes
The change in the demand for a good
as a result of a change in the income of a
consumer.
Normal goods: a good for which an
increase in income increases consumption,
ceteris paribus
Inferior goods: a good for which an
increase in income decrease consumption,
ceteris paribus.
Ceteris paribus- is where all other variables
are kept equal
What is the impact of a change in
income?
- An increase in income results in an
increase in the demand for goods and
services while a decrease in income
results in a decrease in demand.
How do changes in income affect the
economy?
- Higher income levels can lead to
higher prices because consumers
spend more and demand rises
allowing businesses to charge more.
Income consumption curve
- the set of equilibrium commodity
bundles traced out as the consumers,
income varies ceteris paribus.
- It shows how the consumer’s
purchase vary with his income
- Upward to the right because demand
for normal goods increases as the
income of the consumer rises. There
is a direct relationship between
income of the consumer and
consumption of that normal good
charge more.
Market Demand Curve: the relationship
between a commodity’s price and the
quantity demanded by all market
participants, ceteris paribus
Horizontal Summation: the process of
adding together individual demand curves to
derive the market demand curve
Individual vs Market
Theory of Rational Decision making- this
theory states that individuals use their self-
interest to make choices that will provide
them with the greatest benefit. People weigh
their options and make the choice they think
will serve them best.
One of its theory of choice is the
“conspicuous consumer” who likes to buy
more of a certain kind of wine when its price
goes up.
A related use of demand theory is to make
predictions about how people, or certain
groups of people will react in various
circumstances.
SECTION RECAP
The goal of microeconomics is to
predict how people’s behavior will change
when their circumstances change. The
method of comparative statics allows us to
do just that. All we have to do is to covert
the “change in circumstances” to a change in
budget constraint, and find the individual’s
utility-maximizing decision subject to a new
budget constraint. Of a particular interest is
how the consumption of a commodity
changes when its price changes, ceteris
paribus.
Price changes and Consumer welfare
Price changes
- Price changes can happen because of
changes in the conditions of demand
and supply.
- But they can also arise from
government interventions in market
and changes in market bought about
by adjustments in business
objectives.
Consumer Welfare
- Consumer welfare refers to the
individual benefits derived from the
consumption of goods and services.
In theory, individual welfare is
defined by an individual own
assessment of his/her satisfaction,
given prices and income. Exact
measurement of consumer welfare,
therefore requires information about
individual preferences.
Substitution and Income effect
Substitution effect: It refers to the concept
that as the price of a good rises, we tend to
substitute away from the expensive goods
towards cheaper goods if possible.
Income effect: Change in your real income
or your purchasing power. As the price of
the goods rises, buyer must pay more
amount to receive the same amount and as a
result they’re real income has decreased and
they buy less resulting in a decreases of the
quantity demanded.
Giffen good: A non-luxury or low-priced
goods for which demand increases as the
price increase and vice versa, thus defying
the standard laws of demand.
Normal Good: In economics, a normal
good is a type of a good which experiences
an increase in demand due to an increase in
income, unlike inferior goods, for which the
opposite is observed.
Inferior Good: An inferior good is one
whose demand drops when people's incomes
rise. When incomes are low or the economy inputs to the production
contracts, inferior goods become a more sector of the economy
affordable substitute for a more expensive
• The two most important
good. Inferior goods are the opposite of
inputs supplied by household
normal goods, whose demand increases even
are their labor and their
when incomes increase
capital.
Slutsky Equation
• For most households, the
Total Effect= Substitution effect + Income single most important source
effect of income is labor.
Slutsky Equation: Before the prices
change
Utility and Indifference Curve
P1 x 1+ P2 x 2=m ¿
¿  the utility function transforms the
person’s consumption of goods and
Where m is the budget
leisure into an index that measures
the individual’s level of satisfaction
or happiness. This index is called
Slutsky Equation: After the prices change
Utility, the higher the level of index,
1
P1 x 1+ P2 x 2=m+ ∆ m the happier the person.

Where m is the budget and ∆ mchange of 4 Properties of Indifference Curve

Income/Budget • Indifference curves are
Compensating and Equivalent Variations downward sloping.

Compensating Variation: It is the amount • Higher indifference curves

of money we have to give that consumer to indicate higher levels of
compensate him/her for the price increase. utility.

Equivalent Variation: It is the amount of • Indifference curves do not

money that we have to take away to lower intersect.
his utility as much as the price increases. • Indifference curves are
convex to the origin

Labour Supply (Household as Suppliers) Marginal rate of substitution (MRS)

• People’s incomes depend at • the ration of marginal

least in part on their
decisions, and these decisions
are influenced by the rewards
to working and saving.
• In factor markets, people
receive income by supplying
utilities. The Assumption that
indifference curves are
convex to the origin is
essentially an assumption
how the marginal rate of
substitution changes as the
 person moves along an
indifference curve.
Consumer’s Disposable Income
• The numeraire throughout is
the consumption good. That
is, all prices will be in terms
of units of consumption. (in
real terms)
• The consumers receives a
real wage (w) per hours, so
real wage income is denoted
as wN^s. The consumer also
pays taxes (t) to the
government.
Decomposing the impact of wage change
to income and substitution effect
• A price reduction in
something you are selling
(labor) reduces your real
income.
• Whereas as a price reduction
in something you are buying
(commodities) increases your
real income.
• This is why income and
substitution effects go against
each other for normal good
that are sold.

• The consumer receives π

units of current
consumption, known as the
non-labor income.
• Hence, the disposable income
is:
wN^s + π - T

Consumer’s Budget Constraint

The consumer's budget constraint (BC) is:
c=wN^s + π - T
Substituting the constraint gives:
c = w (h - l) + π - T
can also be written as:
c + wl = wh + π - T