Topic 13.

Consumptions
Prepared by: Leovenza P. Villacorte

Consumptions or pleasure one gets from consuming it. Consumptions is defined

as the use of goods and services by households.it is a component in the calculation of
the gross domestic product (GDP).
A consumers is a person (or group) who pays to consume the goods and/or
services produced by a seller (i.e., company, organization).

Approaches in the study of consumers choice and demand

1. Cardinal approach gives a value of utility to different options.
2. Ordinal approach just ranks in terms of preference.

Total utility is the entire amount of satisfaction a consumer receives from consuming a
good at various rates.
Marginal utility is the extra satisfaction a consumer realizes from an additional unit
of a product. It is the change in total utility as the quantity of the good is changed.

Formula: Mu = change in Tu
change in q

Table 1. Schedule of total utility and marginal utility of a student for product x

Graph 1. Graphical Presentation of total utility and marginal utility

of a student for product x
Relationship between total utility and marginal utility

As more of a product is consumed, total utility increasing at a diminishing rate,

reaches a maximum, and then declines.
Marginal utility diminishes with increased consumption, becomes zero when total
utility is maximum and is negative when total utility declines.

The Utility (Cardinal) Approach

Law of diminishing marginal utility

It states that as a person consumes more of a given commodity (the consumption
of other commodities being held constant), the marginal utility will eventually tend to
decline.

Utility - maximizing rule or allocation rule. It is also called “the consumer is in

equilibrium position

Budget allocation rule/ utility – maximizing rule

Formula: mux = muy

px py

Consumer equilibrium
Formula: I = (𝑃𝑎 x a) + (𝑃𝑏 x b) + (𝑃𝑐 x c) or
I = QxPx + QyPy

Indifference Curve Analysis (Ordinal Approach)

Consumes state their preferences by just ranking bundles or combinations of
goods according to utility received from these.

The Indifference Curve Analysis (Ordinal) Approach

1. They are down sloping/negatively slope
2. They are convex to the origin
3. They never intersect

Marginal rate of substitution (MRSxy)

The slope of the indifference curve. It shows the rate at which the consumer will
substitute one good for the other (say b or a) to remain equally satisfied.
Formula mrsxy = change in y
change in x
 The diminishing slope of the indifference curve means the willingness to substitute
b for a diminishes as one moves down the curve or the consumer will be willing to give
up smaller and smaller amounts of x to offset acquiring each additional unit of y.

Graph 2. Indifference curve

Indifference map is a set of indifference curve. Each curve in the indifference curve
reflects a different level of utility. Curves further from the origin indicate higher levels of
total utility.

Graph 3. Indifference Ma
The Budget Line

Budget line is a schedule or curve that shows various combinations of two products
a consumer can purchase with a specific money income.

Graph 4. Budget Line

Characteristics of Budget Line
1. Income changes - an increase in money income shifts the budget line to the right, a
decrease in money moves it to the left.
2. Price changes - a decline in the prices of both products shifts the curve to the right, an
increase in the prices of a and b shifts the curve to the left.