THE THEORY OF CONSUMER

BEHAVIOR
Objectives:
1. Define consumer behavior.
2. Understand utility function,
and;
3. Significance of consumer
behavior in business.
 After a long walk under the heat of
the sun, you will feel very thirsty. The
first glass of water you will take will
definitely give you satisfaction, while
the second glass will add more
satisfaction. As you take more glasses
of water, the satisfaction level
reaches a maximum. And if you
continue on drinking the water, most
probably you will experience
dissatisfaction because you will have
unpleasant feeling.
CONSUMER – a person who
purchases goods and services for
personal use

CONSUMPTION– is the use of goods

and services to satisfy human wants
directly

BEHAVIOR – response of a person to

any situation.
CONSUMER BEHAVIOR - is the
study of how people make
decisions about what they buy,
want, need, or act into a product,
service, or company.

CONSUMER THEORY – describes

how consumers make decisions on
what to buy
THE UTILITY FUNCTION
A consumer aims to maximize
the satisfaction he/she derives from
the use of a good or service.
Utility is the term used for
satisfaction. It is something
intangible as such, it is not easy to
measure.
Quantifiable goods are subject to
measurement; they can be
expressed in numerical values.
 To understand the concept of
utility, it is measured in units or
utils which is equivalent to one unit
of satisfaction.
The UTILITY FUNCTION shows
the relationship between utility and
consumption. In equation form, it
is:
U = f (C)
Stated as: Utility is a function of
consumption
 To be more specific, utility for
the consumption of goods X and Y
can be expressed as:

U = f (X,Y)

Important measures of utility are:

a. Total Utility – refers to the
combined utility derived from
consuming certain units of a good
2. Marginal Utility – refers to the
additional utility derived from
consuming an additional unit of a
good.
Hypothetical Utility Schedule of
Marvin for Chocolate Candy
Quantity of Consumption Total Utility Marginal Utility
1 8 8
2 15 7
3 21 6
4 26 5
5 30 4
6 33 3
7 35 2
8 36 1
9 36 0
10 35 -1
Total Utility (TU). It refers to the
total amount of satisfaction one
obtains from the consumption of
goods and services.

Marginal Utility (MU). It is the

additional satisfaction obtained
from the consumption of an
additional unit of goods and
services.
 From the schedule, when Marvin
eats the first bar he gets a utility of
8. The second bar gives him a
utility of only 7. While his total
utility increases with each
additional chocolate bar , the
additional utility becomes lesser
and lesser.
The satisfaction he derives from
each additional units starts to
diminish.
 Notice that upon eating the 9th
bar, total utility does not changed at
all which means that there is no
additional utility derived from the
ninth unit.
Marginal utility at 9 units of
consumption is equal to zero. As he
consumes the 10th bar, instead of
increasing, the total utility declines
and marginal utility is even
negative.
Are there physical manifestations
of a negative marginal utility?
Yes, physical discomforts such as an
upset stomach, dizziness, and
indigestion are signs that instead of
adding to one’s utility, the
consumption of the additional unit
of the good has resulted in the
decrease of the total utility derived.

The situation illustrates the

LAW OF DIMINISHING MARGINAL
UTILITY
 The law states that as additional
units of a good are consumed, the
additional utility derived from
each additional unit tends to
diminish.
The reason for this behavior is
the situation of human wants.
Man’s wants can be satiated at a
given time.
 SIGNIFICANCE OF CONSUMER
BEHAVIOR IN BUSINESS
The consumer is the person who buys
the product business offers for sale. It is
therefore imperative that we get to
please the consumer, so he/she will buy
from us instead of from our
competitors.
Knowing how consumer satisfaction
is maximized will help a business always
keep the consumer’s welfare the
topmost priority.