Chapter 5: Consumer Behavior

Gatuteo, Ganancial, Fernandez

The Concept of Choice
and Utility
 UTILITY denotes satisfaction, a subjective pleasure that an
individual can derive from consuming a good or service. In
economics, it explains how individuals divide their limited
resources among the commodities that provide them
satisfaction.

The economic theory of the consumer: “THE CONSUMER

PREFERS THE BEST BUNDLE OF GOODS THAT HE CAN
AFFORD.”

Taste and Preferences and Income are the factors that make
an individual decide what bundle of goods to consume.
Can we measure
Satisfaction?
01 Cardinal Utility 02 Ordinal Utility
Theory Theory
-This theory uses the -The only thing that
Cardinal Ranking consumers can do is to
Preferences, which rank or order their
attaches specific numbers preferences referred to as
to different levels of Ordinal Ranking
satisfaction Preferences.
Tastes and Preferences
An individual has a distinctive way of choosing
what is best for him/her in gaining satisfaction. Your
preferences depicts which goods provide satisfaction and
how much satisfaction you will receive. Because of the
ordinality of Utility, economists suggest that it should be
treated as constant. The only way to measure satisfaction
is to examine relative prices, which is measured in peso.
It can be concluded that changes in taste and preferences
are less important than income and relative prices.
 The Law of
Diminishing
Marginal Utility
Law of Diminishing Marginal Utility
This law states that as an individual consumes more unit of
commodity per unit time, his/her total utility increases, reaches its
maximum, and starts to decrease. It means that as more goods are
consumed, the extra satisfaction or marginal utility received
decreases.

Example:
Pork Lechon is one of your favorite Filipino food. Your
breakfast of pork lechon gives you a magnificent meal. Your lunch of
the same meal doesn’t give the same tasty experience, meaning the
extra satisfaction or your marginal utility is already diminishing. Your
dinner with pork lechon gives you less and less utility.
 Pork Lechon Total Utility Marginal Utility
(Qx) (TU) (MU)
0 0
17.5
1 17.5
13.5
2 31
10.5
3 41.5
8.5
4 50
4
5 54
0
6 54
-9
7 45

MU=∆TU/ ∆Q
The Consumer’s
Equilibrium
Consumer’s Equilibrium
Consumers will attempt to maximize total utility or satisfaction from spending their income. If
total utility is maximized with regard to their income, it means that they are in equilibrium; or,
spending the last peso of their income on two goods until the utility or satisfaction derived in
consuming both goods is the same.

This can be mathematically expressed as:

Subject to the following constraints:

Px Qx + Py Qy+…= M (income)

Quantity 1 2 3 4 5 6 7 8 9 10
MUx 96 93 88 80 76 60 52 48 45 40
MUy 73 68 60 58 50 40 35 30 27 20

Good X = Php. 10.00 Income =Php 100

Good Y= Php 5.00
The Three Assumptions of Rational Preferences
COMPLETENESS NON-SATIATION TRANSITIVITY
01 A property of
02 03
“more is better”. A If bundle A is
preference that bundle of one good preferred over
implies a bundle of and no less of the bundle B, and
goods can be other is preferred or bundle B is preferred
ranked as preferred, indifferent to over bundle C, then
indifferent, or less otherwise equivalent bundle A is preferred
preferred to one bundle. over bundle C.
another.
PREFERRED-
choosing one over
the other,
INDIFFERENT- gain
the same
satisfaction with
two bundles.
 The Indifference Curve

A curve which shows the different combination of

good X and good Y which yield the same level of
utility.
 Indifference Curve
y

Characteristics
• Negatively sloped
• Convex to the origin
• Do not intersect

Marginal Rate of Substitution(MRS): The amount of good Y that a consumer is willing to give up in exchange for
good X and still lies on the same indifference curve.
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