BAC 2 FINAL REVIEWER Ex. private jet, yacht, luxury cars, perfumes, jewelry.

4. Economic and free good

CONSUMER CHOICE AND UTILITY  is that which is both useful and scarce. If a good
MAXIMIZATION is so abundant that there is enough of it to
satisfy everyone’s needs without anybody
Consumer – is one who demands and consume goods paying for it, that good is free.
and services.
Tastes and Preferences
Consumer choice
 are determined by age, income, education,
 is the ability of consumers to choose among gender, occupation, customs and traditions as
competing products and services. Consumer well as culture. Preferences are the choices made
choice – is the combination of goods and by us consumers as to which products or
services a consumer purchases. services to consume.
Utility - refers to the total satisfaction received from
consuming a good or service.
Maslow’s Hierarchy of Needs (Abraham Harold
Utility, in economics, refers to the usefulness or
Maslow 1908 – 1970)
enjoyment a consumer can get from a service or good.
Maslow’s hierarchy of needs identifies the basic
Utility maximization
priorities of every consumer. Maslow saw human needs
 is the concept that individuals and organizations in the form of a hierarchy, ascending from the lowest to
seek to attain the highest level of satisfaction the highest. He concluded that when one set of needs is
from their economic decisions. satisfied, this kind of need ceases. The basic human
needs placed by Maslow in an ascending order of
Goods and Services importance are (like a pyramid): a. physiological needs;
Goods b) security or safety needs; c) social needs; d) esteem
needs; and e) self-actualization needs.
 refer to anything that provides satisfaction to the
needs, wants, and desires of the consumer. They
can be any tangible economic products.
Services
 are any intangible economic activities, that
likewise contribute directly or indirectly to the
satisfaction of human wants.
Tangible goods can be classified according to, but not
limited to, the following:
1. Consumer goods
 these are the goods that yield satisfaction
directly to any consumer. These goods are
primarily sold for consumption, and not to be Physiological needs
used for further processing or as an input or raw  these are the basic needs for sustaining human
material needed in producing another good. life itself.
Usually, these are the goods that are easily
accessible to consumers (ex. soft drinks, bread, Safety needs
crackers, cellular phone loads, clothes)
 these are the needs to be free of physical danger
2. Essential or necessity goods and the fear of losing one’s work, property, food
or shelter.
 are goods that satisfy the basic needs of man. In
other words, these are goods that are necessary Social needs
in our daily existence as human beings.
 these needs cover the value of the sense of
These are also goods that we cannot live without such as belongings, love, care, acceptance and
food, water, shelter, clothing, electricity, medicine). understanding of family, relatives and friends,
and to be accepted by others.
3. Luxury goods
Esteem needs
 are those which men may do without, but which
are used to contribute to his comfort and well  these needs explain the importance of self-
being. esteem, recognition, status of an individual and
the general acceptance of the society to an
 individual. This kind of need produces such yoursatisfaction from the good declines as you consume
satisfaction as power, prestige, status, and self- more of it.
confidence.
Law of Diminishing Marginal Utility
Self-actualization needs
As a consumer gets more satisfaction in the long-run,
 these needs explain the worth of a person’s self- he/she experiences a decline in his satisfaction for goods
development, growth and realization and and services.
achievement. According to Maslow, this is the
Hypothetical Utility Schedule for Siopao
highest need in the hierarchy. It is the desire to
become what is capable of becoming – to Unit Purchased Total Utility Marginal Utility
maximize one’s potential and to accomplish
something. 1 40 40
2 90 50
THE UTILITY THEORY 3 170 80
4 270 100
Utility (economics) 5 350 80
The table shows the various units purchased, the total utility
 refers to the satisfaction or pleasure that an for each unit purchased, and the corresponding marginal
individual or consumer gets from the utility.
consumption of a good or service that she/he
purchases. For purposes of economic analysis, Mathematical derivation of marginal utility
utility is also measured by how much a Marginal utility is simply the change in total utility
consumer is willing to pay for a good/service. divided by the change in quantity. Thus,

Utility theory - is based on this assumption of ∆TU

rationality and describes all decision outcomes (financial MU = ----------
and otherwise) in terms of the utility (or value) placed on ∆Q
them by individuals.
Expanding our equation, we can solve for marginal
Utility theory
utility using the following equation:
 it is a theory postulated in economics to explain
behavior of individuals based on the premise TU2 – TU1
people can consistently rank order their choices MU = ----------------
depending upon their preferences. ... that seeks Q2 – Q1
to explain the individuals' observed behavior and
Where:
choices.
TU2 = the new total utility
Important Concepts on Utility Theory
TU1 = the original utility
1. Marginal utility – is the additional satisfaction that
an individual derives from consuming an extra unit of a Q2 = the new quantity consumed
good or service. Marginal means “additional” or
Q1 = the original quantity consumed
“extra”. The marginal utility of a commodity is the
increase in total utility or satisfaction derived from the Applying the formula, determine the marginal
consumption of an additional or extra unit of such utility from the consumption of 2 pieces of siopao to 3
commodity; it is the loss of utility or satisfaction if one pieces using the total utility presented in the table above.
unit less is consumed.
SEATWORK - Applying the formula, determine the
2. Total utility - is the total satisfaction that a consumer marginal utility from the following consumption using
derives from the consumption of a given quantity of a the total utility presented in the table above.
good or service in a particular time period. It is also the
total benefit that a person gets from the consumption of a Unit Total Marginal
good or service. Purchas Utility Utility
ed
Hypothetical Demand Schedule for Siopao
3 190
Price(P) Quantity Demanded (QD)
5 215

15.00 1 9 250
12.75 2
10.50 3 12 280
8.25 4
The table shows that as you continue to buy siopao, your 20 350
willingness to pay for it continuously declines because
25 390
 32 430

36 450

Theory of Consumer Behavior

Consumer behavior theory - is the study of how people
make decisions when they purchase, helping businesses
and marketers capitalize on these behaviors by
predicting how and when a consumer will make a
purchase.
Consumer Choice and Budget Constraint
The Indifference Curve
Consumer choice - is the ability of consumers to choose
Another important concept used in explaining consumer
among competing products and services. Consumer
behavior is the indifference curve. An indifference curve
choice – is the combination of goods and services a
is a line that shows combinations of goods among which
consumer purchases.
a consumer is indifferent.
The theory of consumer choice is the branch of
An indifference curve shows a combination of two
microeconomics that relates preferences to consumption
goods that give a consumer equal satisfaction and utility
expenditures and to consumer demand curves. It
thereby making the consumer indifferent.
analyzes how consumers maximize the desirability of
their consumption as measured by their preferences Combination Meat Price of Fish Price of
subject to limitations on their expenditures, by (kg Meat (P) (kg) Fish (P)
maximizing utility subject to a consumer budget A 5 500 1 100
constraint. B 4 400 2 200
C 3 300 3 300
Budget constraint represents all the combinations of D 2 200 4 400
goods and services that a consumer may purchase given E
1 100 5 500
current prices within his or her given income.
Utility Maximization Rule The Table shows the various combinations of kilos of
1. Allocate the entire available budget meat and fish consumed with corresponding prices that
eventually yield equal satisfaction to consumer.
2. Make the marginal utility per peso spent the same for Regardless of the combinations chosen, all of them shall
all goods. provide an equal amount of satisfaction to the consumer.
Consumer Surplus Marginal Rate of Substitution (MRS)
The concept of the marginal rate of substitution is the
key to “reading” a preference map. The marginal rate of
Consumer surplus substitution is the rate at which a person will give up
 is a measure of the welfare we gain from the good Y (the good measured on the y-axis) to get more of
consumption of goods and services, or a good X (the good measures on the x-axis) and at the
measure of the benefits that we derive from the same time remain indifferent (remain on the same
exchange of goods. indifference curve). The MRS is measured by the
magnitude of the slope of an indifference curve.
Consumer surplus
If the indifference curve is steep, the MRS is high. This
 is the difference between the total amount that implies that the person is willing to give up a large
consumers are willing and able to pay for a good quantity of good Y, to get a small quantity of good X,
or service and the total amount that we actually while the remaining indifferent. But if the indifference
pay for that good or service. curve is flat, the MRS is low. In other words, the person
is willing to give up only a small quantity of good Y to
A consumer surplus- is defined as the gap between
get a large amount of good X to remain indifferent.
what consumers are able and willing to pay, and the
actual price paid. MRS = ∆Food Consumption
∆ Clothing Consumption
Where:
∆ = Change
Food Clothing Marginal
Consumption Consumption Rate of
Substitution
56 1 -
46 2 -10
37 3 -9
29 4 -8
22 7 -2.33
16 12 -1.2
11 15 -1.67
8 20 -0.6
5 24 -0.75
3 30 -0.33
2 35 -0.2