5/8/2023

CHAPTER 4
The theory of C

consumer behavior

Theory of

1
consumer utility
1.1. Definition
1.2. The law of diminishing
marginal utility
1.3. Its applications

1.1. Definition

Utility– U: A measure of happiness

or satisfaction that aC person gets from the
consumption of a good or service

1
 5/8/2023

1.1. Definition
• Total utility – TU: The total benefit or
satisfaction that a person gets from the
consumption of goods and services
TU = TUX + TUY + … + TUZ
• A consumer’ TU:
Goods Utility
1 cup of milk tea 10
TU = 40
1 pizza 4Ps 30
4

1.1. Definition
Marginal utility – MU: The change in total
utility resulting from a one-unit increase in
the quantity of a goodC consumed.
MU = ∆TU/∆Q or MU = TU’(Q)
MU MU MU MU

1.2. The law of diminishing marginal utility

In a certain time period, continuous

consumption will tend to decrease in
marginal utility

2
 5/8/2023

1.2. The law of diminishing marginal utility

X TU MU
0 0 -
1 3 3 if it different —> law wrong
X Ex:
2 5 2
1. same clothes —> decrease mu, but different
3 6 1 clothes —> increase mu -> law right
4 6 0 2. Same banh mi thịt —> decrease mu, but different
5 5 -1 types of banh mì —> mu increase —> law wrong
X

1.2. The law of diminishing marginal utility

MU > 0  TU X
MU = 0  TUmax
MU < 0  TU
X

1.3. Its applications

MU > P: TU↑  Buying more

X
MU = P: TUmax
MU < P: TU↓  Buying less

3
 5/8/2023

MU

MU1

MU2

MU
The higher MU, Q
the higher willingness to pay P
Q1 Q2

P1

P2

D
Q
Q1 Q2

1.4. Consumer surplus

Consumer surplus (CS) is the
amount a buyer is willing to
pay for a good minus the
amount the buyer actually
pays for it.

CSx = MUx – Px

1.4. Consumer surplus

The area below the demand curve

and above the market price line

4
 5/8/2023

2
Consumer
preferences
2.1. Definition
2.2. Assumption
2.3. Indifference curve

13

2.1. Definition
Consumer preference is a concept that refers to the
choices consumers make to maximize their
satisfaction.
2.2. Assumptions
Completeness;
Transitivity; bắc cầu
Non-Satiation. không thoả mãn

14

2.3. Indifference curve

đường bàng quan

Indifference curve is a curve that shows

consumption bundles that give the
consumer the same level of satisfaction.

15

5
 y

B
5/8/2023
I1: B = C
A I2: A = C
C Transansitivity —> B = C
But B > A —> not logical

2.3. Indifference curve

• Downward-sloping;
• Do not cross;
• Higher indifference curves
are preferred to lower ones;
I3
I2 • Bowed inward  Marginal
I1 rate of substitution (MRS)

because we have to trade off between x and y because it combines higher of goods

if we have one more x, so how many y do we have to trade off

2.3. Indifference curve

• Marginal rate of substitution Y
(MRS) of good X and good Y
(MRSxy) is the rate at which the
consumer is willing to substitute
one good for the other (to keep 7
equal satisfaction). -3
MRSx,y = ∆Y/∆X 4
2 -2
• MRSxy = slope of -1
1
indifference curve (I)
X
3 4 5 6

17

2.3. Indifference curve

Y

MRSx,y = -3
 To keep the equal
satisfaction, to increase 1 cup 7 MRS diminishes
of milk tea  decrease 3 -3
grilled steaks 4
2 -2
1 -1
(I)
X
3 4 5 6

18

6
 W 5/8/2023

W* 100

2.3. Indifference curve

Y
Relationship of MRSxy and
MUx, MUy:
MRSxy = - MUx MUy
A

 ∆Y ∆X = - MUx MUy B
C D
(I)
X

19

2.3. Indifference curve

Perfect substitutes: Perfect complements:

Pencil Left
shoe

Black Right
pen shoe

mrs doesn’t exit

3 Budget constraint

21

the budget constraint shows the various

bundles of goods that the consumer can
buy for a given income

7
 5/8/2023

Bugdet constraint
Bundle T-shirt (X) Pizza (Y) Total spending
PX = $1 PY = 2 X.PX + Y.PY = I
A 0 40 80

B 20 30 80

C 40 20 80

D 60 10 80

E 80 0 80

The budget constraint equation

I = X.PX + Y.PY
I Px
Y= – .X
Py Py
BC

Slope

• I decreases: BL
shifts inward,
parallel to its initial
position;
• I increases: BL
shifts outward,
parallel to its initial
position.

8
 5/8/2023

I and Py unchanged,
Px changes  BL
pivots from the
vertical axis

4 Optimal choice

26

Optimum = (I) ∩ (BC)

At the optimum Y
Px MUx
= Optimum
Py MUy
MUx MUy
 =
Px Py
At the optimum, the marginal
utility per dollar spent on good X I3
equals the marginal utility per I2
I1
dollar spent on good Y. X
(BC)
27

9
 5/8/2023

To maximize utility: Optimum

MUx MUy
=
Px Py
X.Px + Y.Py = I I3
I2
I1
X
(BC)
28

10