Republic of the Philippines

CAVITE STATE UNIVERSITY

Imus Campus
Cavite Civic Center Palico IV, Imus, Cavite
 (046) 471-66-07 / (046) 471-67-70/ (046) 686-2349
www.cvsu.edu.ph

Theory of Consumer
Behavior

CRISTAL, BABY KHAREN A.

 The theory of consumer behavior
describes how consumers buy different goods
and services. Furthermore, consumer behavior
also explains how a consumer allocates its
income in relation to the purchase of different
commodities and how price affects his or her
decision. There are two theories that seek to
explain consumer behavior. These are the
utility theory and the indifference preference
theory.
Consumer Behavior-Assumptions

An assumption means a statement that

is held to be true.
1. Rational Consumer - A decision-making
process that is based on making choices that
result in the most optimal level of benefit or
utility for the individual. Most conventional
economic theories are created and used under
the assumption that all individuals taking part
in an action/activity are behaving rationally.
2. Budget Constraints – It represents all the
combinations of goods and services that a
consumer may purchase given current prices
within his or her given income. Consumer theory
uses the concepts of a budget constraint and
a preference map to analyze consumer choices.
3. Consumer Preferences - The underlying
foundation of demand, therefore, is a model of
how consumers behave. It allows a consumer to
rank different bundles of goods according to
levels of utility, or the total satisfaction of
consuming a good or service.
Model of Factors Influencing Behavior
1. Cultural – It exert the broadest and
deepest influence on consumer behavior.
Culture is one of the most fundamental
determinants of a person’s want’s and
behaviors. The child growing up in society
learns a basic set of values, perceptions,
preferences, and behaviors through a process of
socialization involving the family and other key
institutions.
2. Social – A consumer’s behavior is also
influenced by social factors such as the
consumer’s reference groups, family, and
social roles and statuses.
3. Personal – A buyer’s decisions are also
influenced by personal outward characteristics
such as:
age, occupation, economic circumstances,
lifestyle, personality, and self-concept.
4. Psychological – A person’s purchases are
also influenced by psychological factors:
motivation, perception, learning, beliefs, and
attitudes.
Maslow’s Theory of Motivation.
Abraham Maslow sought to explain why
people are driven by particular needs at
particular times.
Maslow’s Hierarchy of Needs
 A person will try to satisfy the most
important needs first. When a person succeeds
in satisfying an important need, it will cease
being a motivator for the present time. And the
person will be motivated to satisfy the next
most important need.
 Utility is defined as the
satisfaction derived from the
consumption of a commodity which
determines consumption and demand
behavior. As such, it is the foundation
of consumer’s behavior.
The Utility Theory of Demand

The utility theory explains consumer

behavior in relation to the satisfaction that a
consumer gets the moment he consumes a good.
This theory was developed and introduced in 1870
by a British Economist, William Stanley Jevons.
When we speak of utility in economics, we refer to
the satisfaction or benefit that a consumer derives
of his consumption. The utility theory of demand
assumes that satisfaction can be measured. The
unit of measure of utility is called utils.
 Law of Diminishing Marginal
Utility - The fundamental assumption of
utility theory of demand is that the
satisfaction that a person derives in
consuming a particular product diminishes
or declines as more and more of a good is
consumed. In other words, as successive
quantity of goods is consumed, the utility
we derive diminishes. This is called the law
of diminishing marginal utility.
The Utility Function

TU Total Utility = Function of Q (Consumption)

∆ (TU)
MU Marginal Utility =
∆Q

Note: MU is the satisfaction from an additional

unit of consumption
Utility Curves
 In conclusion, the diminishing
marginal utility (MU) causes the total
utility (TU) to decline eventually, for which
reason maximum consumption is only up
to the point of maximum utility.
Indifference Preference Theory
Economist Vilfredo Pareto developed this
modern approach to consumer behavior.
Under this, that analysis of consumer behavior
is described in terms of consumer preferences of
various combinations of goods and services
depending on the nature, rather than from the
measurability of satisfaction in our previous
discussion of the utility theory.
 Indifference Curve - An indifference
curve is a locus of points each of which
represents a combination of goods and services
that will give equal level of satisfaction to a
consumer. To illustrate this, we consider an
individual who prefer a combination of 2 goods,
say, food and clothing. The table shows the
combination of the quantities of the
commodities that a consumer prefers. Let us
assume that he is indifferent to any of the
combination of food and clothing.
 Between any two points along the
indifference curve, the ratio between utility
gained and utility foregone is always equal to 1
and, therefore, constant. However, this is not
true of the corresponding substitution between
the commodity items. It is measured as how
much Good X has to give up to consume an
additional unit of Good Y.

∆ Food Consumption
MRS =
∆ Clothing Consumption
Indifference Curve
 Budget Line - The income of an
individual acts as constraints on the qualities of
bundles of goods he can purchase. We can buy
commodities only up to the extent that our
income allows us. It contains infinite points of
combinations of the commodity items that the
same budget can buy at a given prices.
Assuming food and clothing as the commodities
being purchased.
B = Pf Q f + (Pc )(Q c )

B
max Q f = maximum for F (food)
Pf
B
max Q c = maximum for C (clothing)
Pc
where:
B = Given budget
Q f = Quantity of food
Q c = Quantity of clothing
• Price of Food = P 50
• Price of Clothing = P 100
• Rate of Substitution of Food to Clothing = 2
 Consumer Equilibrium -
Consumer equilibrium refers to the
combination of goods that will give
the highest level of satisfaction to a
consumer that is within his purchasing
power.
The Paradox of Value

Question:
How is that WATER, which is so useful,
that life is impossible without it, has such a low
price, whereas DIAMONDS which are not quite
necessary have such a high price?
Answer:
The answer to this question lies in the
equilibrium theory of supply and demand as
well as the theory of diminishing marginal
utility.
Despite its importance, the price of water
is low as consumers are only willing to pay less
for its abundance and low level of marginal
utility. However, the opposite is true for
diamond which is scarce. The foregoing leads to
the distinction between Value in Use and Value
in Exchange.
“The total utility of water does not
determine its price or demand.”

- Paul Samuelson