CONSUMER BEHAVIOR

Managerial Economics
OUTLINE
• The concept of Utility
• Consumer Equilibrium
• Indifference Analysis
• Substitution
• The Budget Line
The Concept of Utility
• As an individual has wants, it is normal for him
to desire to satisfy those wants.

• In this regard, he already has a set of preferences

for goods and services and if not, he is on his
way to preparing one.

• How the consumer is able to establish a set of

preferences for goods and services?
What is Utility?
• It is the power of goods and services to satisfy
wants.

• “the pleasure or satisfaction associated with

having, using, consuming, or benefiting from
goods or services.”

• The quality of the product or service is primarily

responsible for its power to satisfy wants.
Causes and Sources of Utility
• Security
• Pride
• Power
• Pleasure
• Comfort
• Ease of use

• Note: A good that may satisfy a person may not

necessarily satisfy another.
A thing that possesses a want-gratifying
quality may not possess utility if it is not
capable of being used
Measuring Utility
• The pleasure or satisfaction derived from using a
product or service is psychological and thus, is
incapable of measurement in absolute terms.

• Two ways:
▫ Cardinal Utility approach
 Measured by Numerical Values (Ex. 1 util, 12 utils)
▫ Ordinal Utility approach
 Measured by ranks (Ex. Most Satisfying to Least
Satisfying
Marginal Utility
• “the satisfaction an individual receives from
consuming one additional unit of good or
service”

• This means that total utility of the product or

service increases as more units are
consumed.
Schedule of Total and Marginal Utility for
Consumption of Guavas
Guavas Total Utility Marginal Utility
(in pieces) (in utils) (in utils)

1 50 50
2 80 30
3 100 20
4 110 10
5 90 -20
6 20 -70
Consumer Equilibrium
• It is the most preferred combination of goods to
buy.

• The consumer cannot buy everything he wants

because of his limited income. Rather, he is
forced to compromise and decide what and how
much of each of the many items he can afford
and will best suit his needs.
Indifference Analysis
• This means that when the consumer is faced
with a set of alternative “bundles” of goods,
consumer is able to rank them all in order of
preference.
Substitution
• Commodities which can be used or consumed in
place of other goods.

• If a rise in the price of a good causes an increase

in the demand for another, these two goods
qualify as substitutes.
Types of Substitutes

• Close substitutes – it provides an almost or

equal level of satisfaction as that of the
substituted good or service.
•
Weak substitutes – it provides a lower level of
satisfaction than the substituted good or service.
Budget Line
• It is “the line on a diagram that shows the
various combinations of commodities that can
be bought with a given income at a given set
prices”

• It is a useful tool in determining the

combinations of goods and services that will
satisfy the consumer with a limited income or
budget to spare.
Thank You!