INSTITUTE OF EDUCATION, ARTS & SCIENCES

SSE 106
Microeconomics
 Institutional Prayer
All:
Lord, we turn our life and will over to You
That we will cease to struggle alone
But instead allow You to lift us up
On eagle’s wings.
Leader:
Saint Michael, defender of the Church of God,
take us under your care and protection.
All:
This we humbly pray.
Amen
INTENDED LEARNING OUTCOMES:

Identify and explain the factors affecting consumer

behavior, the Theory of Utility, the Equimarginal
Principle, the Theory of Production and meaning
of production function;
INTENDED LEARNING OUTCOMES:

Cite specific examples to explain the concept of income

and substitution effects to consumers; and
Discuss the application of the Law of Diminishing
Returns in production.
THEORY OF CONSUMER BEHAVIOR
 TOTAL AND MARGINAL UTILITY

The law behind the downward sloping demand

curve is explained by the theory of consumer
behavior. Basic terminologies in understanding the
concept include the following:
 UTILITY

It means the satisfaction obtained from the goods

and services that a consumer consumes.
 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. Mathematically, MU is the slope of the
TU. The formula is as follows:

Δ𝑇𝑈
𝑀𝑈 =
Δ𝑈
 THE LAW OF DIMINISHING MARGINAL UTILITY (MU)

It states that the successive consumption of the

same good or service increases the total utility will
reach a maximum and beyond this point, the total
utility diminishes.
 THE LAW OF DIMINISHING MARGINAL UTILITY (MU)

Example:

After a long walk under the heat of the sun, you will feel
very thirsty. The first 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.
 THE LAW OF DIMINISHING MARGINAL UTILITY (MU)

Quantity Total Utility (TU) Marginal Utility

(MU)
1 10 -
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

Utility Schedule
THE LAW OF DIMINISHING MARGINAL UTILITY (MU)
 Assumption about the consumer’s behavior:

1. Consumers are able to rank their preferences for the

goods and services.

2. Consumers are consistent or transitive.

3. Consumers prefer “more” of the goods than than “less”

of it.
 INDIFFERENCE CURVE

Indifference curve is a curve which shows different

combinations of two goods which yield the same level of
satisfaction.
 INDIFFERENCE CURVE

The following are the characteristics of indifference curves:

1. They slope downward and towards the right.
2. They do not intersect.
3. They are convex in shape.
 INDIFFERENCE CURVE

Points Quantity A Quantity B

A 11 3
B 8 4
C 5 6
D 3 10
E 2 15

Indifference Schedule
 INDIFFERENCE CURVE

Indifference Curve
 INDIFFERENCE CURVE

Utility=100 Utility=200 Utility=300

A B A B A B

11 12 20 20 35 35

15 7 22 15 37 20

20 5 25 10 40 17

28 3 35 8 45 14

38 2 50 7 53 13
INDIFFERENCE CURVE
 THE BUDGET LINE AND THE OPTIMUM
COMBINATION

A budget line shows the infinite points of

combinations in the consumption of two commodities
that the same budget can buy at constant prices.
 THE BUDGET LINE AND THE OPTIMUM
COMBINATION

A B
Budget 50 0

Schedule 45 2
40 4
35 6
Assume that the budget is 30 8
P500; =10, =25 25 10
20 12
15 14
10 16
5 18
0 20
 THE BUDGET LINE AND THE OPTIMUM
COMBINATION

Budget
Line

Assume that the budget is

P500; =10, =25