UNIVERSITY OF EDUCATION, WINNEBA

SCHOOL OF BUSINESS

DEPARTMENT OF APPLIED FINANCE AND POLICY MANAGEMENT

FIRST SEMESTER 2021/2022 ACADEMIC YEAR

BBA 111 PRINCIPLES OF MICROECONOMICS

THE THEORY OF CONSUMER BEHAVIOUR

HAJIA RAMATU USSIF (Ph.D)

 PRESENTATION OUTLINE
 Introduction
 Influences of Consumer Behaviour
 Views/Approaches to Consumer Behaviour
 The Concept of Utility
 Aspects of Ultility
 Relationship Between Total Utility, average Utility And Marginal Utility
 Equilibrium of the Consumer
 Disequilibrium of the Consumer

BBA 111 Lecture Six

THE THEORY OF CONSUMER
BEHAVIOUR

BBA 111 Lecture Six

 Introduction

 Within the market sphere, the consumer always acts from the demand side and
whatever action is taken by the consumer is motivated by the desire to fulfill
self-interests.

 Consumer behaviour therefore provides us with the basic appreciation of why

demand functions are the way they are.

 Generally the theory of consumer behaviour enables us to understand the

rationale behind the behaviour of the consumer as he/she tries to optimize his/her
satisfaction fromLecture
BBA 111 a fixed
Sixincome.
Influences of Consumer Behaviour

Consumers‘ behaviours are largely influenced by :

Consumers preferences

Incomes of consumers

The interaction between consumers preferences and their budget

constraints.

BBA 111 Lecture Six

 Views/Approaches to Consumer Behaviour

 There are two main approaches to examining consumer behaviour the cardinal and
ordinal perspectives.

 Whereas the cardinalists believe that the satisfaction that is derived from the
consumption of every good can quantified ,

 The Ordinalists take a different view and argue that it is impossible to objectively
quantify the satisfaction that one derives from any good .

 At best we can rank the satisfaction derived from goods .

BBA 111 Lecture Six
 The Concept of Utility

 In consumer theory an important concept which is usually encountered is utility.

 Utility characterizes or defines the power of a good or service to satisfy a want.

 It can also simply be defined as the pleasure or satisfaction that a consumer gains
when he/she consumes a good or service.

 Utility in the context of consumer analysis is seen as being ethically neutral.

BBA 111 Lecture Six

 Aspects of Utility

 Total Utility: defines total amount of satisfaction a consumer derives from

consuming various fixed amounts of goods and services.

 Average Utility: refers to the satisfaction per unit of a good consumed. It is derived
by dividing Total utility by number of units of the given good.

 Marginal Utility: is the extra or additional satisfaction that a consumer obtains

when he/she consumer additional units of the commodity.

 Each of these concepts can therefore be related to the other.

BBA 111 Lecture Six
Formular

BBA 111 Lecture Six

Aspects of Utility
Utility Table for the Consumption of Commodity X
Quantity Consumed Total Utility Average Utility
(QX) (TUX)
0 0
1 10
2 18
3 24
4 28
5 30
6 30
7 28
BBA 111 Lecture Six
Marginal Utility
(AUX) (MUX)
0 0
10 10
9 8
8 6
7 4
6 2
5 0
4 -2
Relationship Between Total Utility, Average Utility and Marginal Utility

• A Graphical Representation of Total, Average and Marginal Utilities

Utility
(Utils)

𝑻𝑼𝑿

𝑨𝑼𝑿

0 Quantity of Good
X

𝑴𝑼𝑿
 Relationship Between Total Utility, Average Utility
and Marginal Utility
 In the above figure 1, as consumption of commodity X increases, total utility
increases, reaches a maximum level and falls thereafter. Marginal utility falls
throughout and turns negative. This means that total utility increases at a
decreasing or diminishing rate as marginal utility falls throughout. Average utility
also falls throughout but does not turn negative. When the average and the
marginal utilities are falling, average utility is greater than marginal utility. The
law of diminishing marginal utility can be obtained from the nature of the marginal
utility curve.
BBA 111 Lecture Six
 The Law of Diminishing Marginal Utility

 The law of diminishing marginal utility: states that all other things being equal, as a

consumer consumes more of a commodity, the marginal utility obtained from each

additional unit of the commodity diminishes.

 The economic implication of this principle in the real world is that, every consumer

all things being equal places less and less value on each additional unit of a

commodityBBA
as more and more
111 Lecture Six of the good becomes available to him.
The Law of Diminishing Marginal Utility

Utils

0
Quantity

MU

BBA 111 Lecture Six

 The Law of Diminishing Marginal Utility

From Table 1.1, it can be realized that as more units of commodity X are

consumed, the marginal utility diminishes, but at a point in time, becomes

negative after the 6th commodity is consumed.

BBA 111 Lecture Six

 Equilibrium of the Consumer
 Recall that in economics the consumer comes across two types of value; Value
in use and Value in exchange.

 Thus for the consumer to achieve equilibrium, he/she must seek convergence
between them.

 In other words in consumer theory, consumer is said to have attained

equilibrium when value in use is equated to value in exchange .

BBA 111 Lecture Six

Equilibrium of the Consumer

BBA 111 Lecture Six

Equilibrium of The Consumer

TE
Utility A
(Utils)

TU

0 Quantity of Good
X
Equilibrium of the Consumer

BBA 111 Lecture Six

Equilibrium of the Consumer II

BBA 111 Lecture Six

Equilibrium of the Consumer

Consumer Equilibrium
Quantity MUX 𝝀𝑷𝑿

0 – 4
1 10 4
2 8 4
3 6 4
4 4 4
5 2 4
6 0 4
7 -2 4
The above schedule is illustrated in the diagram below.

BBA 111 Lecture Six

Equilibrium of the Consumer

Utils
MU
𝝀PX

F
4 𝝀PX

0 4 6
Quantity

MUX

BBA 111 Lecture Six

Derivation of the Demand Curve Using the Cardinal Utility Approach
Utils
MUX

𝐌𝐔𝐗 𝟏 𝛌𝐏𝐗 𝟏 = 𝐌𝐔𝐗 𝟏

𝐌𝐔𝐗 𝛌𝐏𝐗 = 𝐌𝐮𝐗

𝐌𝐔𝐗 𝟐 𝛌𝐏𝐗 𝟐 = 𝐌𝐔𝐗 𝟐

0 𝐗𝟏 𝐗𝟎 𝐗𝟐 Quantity
Price MUX

𝐏𝐗 𝟏

PX

𝐏𝐗 𝟐

0 𝐗𝟏 𝐗𝟎 𝐗𝟐 Quantity
Disequilibrium of the Consumer

BBA 111 Lecture Six

Disequilibrium of the Consumer
The Equi-Marginal Principle
 Factors Which Limit the Ability of Consumers to
Maximize Satisfaction
 The consumer has limited income which restricts his ability to maximize
satisfaction.
 The consumer has no hands in determining prices of goods he/she consumes.
 The consumer may not always have access to certain goods and services he/she
would like to consume.
 Consumer is constrained by time to necessarily decide on whether or not to
depend on goods which are currently available .
 The fixed tastes and preferences of the consumer in the short-run as a result of
getting used to certain goods make it difficult for the consumer to rapidly
reconfigure his consumption patterns to maximize satisfaction especially when new
goods become available
BBA 111 Lecture Six
 Ordinal Utility Analysis

 The main contention of the Ordinal Theorists is that, if a typical consumer

consumes some different bundles of commodities, then s/he is only capable of
judging whether the utility obtained from one is higher or lower than the other(s).
 Thus to them, utility is a concept which by virtue of its subjective nature can only
be ranked or ordered in terms of preferences.

BBA 111 Lecture Six

 Main Axioms of Ordinal Utility Theory

 Completeness: if Y is preferred to X and X is also preferred to Y ,then the consumer

is indifferent and hence X and Y form a complete bundle.
 Reflexivity: This states that any commodity or alternative is as good as itself. Thus,
any given commodity X is as good as Y.
 Transitivity: If bundle X is preferred to bundle Y and bundle Y is also preferred to
bundle Z , then bundle X is preferred to Z.
 Continuity: For any bundle of commodities X,Y and Z, if Y is preferred to X, then
for any bundle Z suitably
BBA 111 close to Y is preferred to X.
Lecture Six
 The Indifference Curve

 In the Ordinal Analysis the main tool/unit of analysis is the indifference curve.

 The indifference curve is the curve drawn in the commodity space defining all
the combinations of commodities which yield the same level of satisfaction to
the consumer.
 This implies that the consumer is indifferent between all the bundles available
along the indifference curve.

BBA 111 Lecture Six

Indifference Curve
Good Y

𝐘𝟏 A

B
𝐘𝟐

C
𝐘𝟑
IC

0 𝐗𝟏 𝐗𝟐 𝐗𝟑 Good X
 Assumptions Underlying the Indifference Curve

Consumers’ preferences can be ordered or ranked.

The satisfaction that a consumer derives from commodities can

influence one another.

There is room for the consumer to substitute one commodity for

the other.

BBA 111 Lecture Six

 Characteristics of the Indifference Curve

Indifference curves are negatively sloped.

Indifference curves are convex /curved to the origin.

The more distant away an indifference curve is from the origin , the higher the level of
satisfaction associated with it.

Indifference curves do not intersect

Indifference curves are everywhere dense in a commodity space.

An Indifference Map
• It shows the graphical representation of two or more indifference
curves showing the various combinations of bundles of commodities
consumed by a consumer given his income and the market prices of
those commodities. IC4>IC3>IC2>IC1.
Y

D
C
B 𝐈𝐂𝟒
A
𝐈𝐂𝟑

𝐈𝐂𝟐

𝐈𝐂𝟏
0
X
 The Budget Line

• This is also known as income line or outlay line or expenditure line or price line. It
shows the various combinations of commodities an individual can buy at various
prices, with a given income over a given period of time.
• Assuming that I is the money income of the consumer which must be equal to his
total expenditure on commodities X and Y.
• Suppose PX and PY represent the money prices of commodities X and Y
respectively, and X and Y represent the quantities of the two commodities.

BBA 111 Lecture Six

The Budget Line
Budget Line Budget Line (in terms of slope)
Y
Y
𝑷𝒐𝒊𝒏𝒕 𝑨 = 𝑷𝑿𝑿 𝑴
A
𝑷𝒀 𝑷
𝑷𝒐𝒊𝒏𝒕 𝑩 = 𝑷𝒀 𝒀 Slope of the Budget Line = − 𝑿ൗ𝑷
𝒀

𝑰 = 𝑷𝑿 𝑿 + 𝑷𝒀 𝒀

Budget Set

0 B 0 𝑴
X X
𝑷𝑿
Properties of the Budget Line

Points on the budget line indicate bundles of goods and services that
use up all the income of the consumer.

Points between the budget line and the origin indicate bundles of
goods and services that cost less than the consumer’s income.

Points above the budget line indicate combinations of goods and

services that cost more than the consumer’s income.
 Shifts of the Budget Line

Two types of shifts are associated with the budget line. These are:
1.Parallel Shifts
2.Rotational shifts.
Whilst parallel shifts connote change in income ,
The rotational change imply change in price.
A parallel shift to the right shows an increase in income whereas leftwards shift
indicate a decrease in income.
An outwards rotational shift leads to a decline in price whilst an inwards rotational
shift brings about an increase in price.

BBA 111 Lecture Six

Shifts of the Budget Line
Y
Change in Income Y Change in Price
𝐘𝟑

𝐘𝟏 Y

𝐘𝟐

0 0
𝐗𝟐 𝐗𝟏 𝐗𝟑
Here, there is a change in income which
enabled the consumer to buy more or less of
both goods. An increase in income led to a
shift of the budget line from X1Y1 to X3Y3
whereas a decrease in income led to a shift of
the income line from X1Y1 to X2Y2.
X 𝐗𝟐 𝐗𝟏 𝐗𝟑 X
Here, there is a change in price of good X which
enabled the consumer to buy more or less of the
good. An increase in price led to an inward shift of
the budget line from YX1 to YX2 whereas a
decrease in price also led to an outward shift of the
income line from YX1 to YX3. Note that the above
diagram could also depict a price change in good
Y, in which case more or less of good Y would have
been bought.
Income and Substitution Effects of a Change in
Price

Whenever there is a change in price of a good it affects the real purchasing power
of consumers assuming incomes remain constant.

Usually whenever there is an increase in price , then it means that consumers are
able to buy less number of units of a good.

Conversely, a decline in price of a good enables the consumer to purchase more.

These situations are regarded as income effects of a price change.

 Income and Substitution Effects of a Change in Price

 By the same token , a change in relative prices also forces consumers to

replace more expensive goods with more units of less expensive goods.

 This is called the substitution effect in consumer theory.

BBA 111 Lecture Six

 EXERCISE

1) Briefly explain the main differences the concepts of the cardinal and ordinal utility theories.
2) Outline the main factors which constrain consumer action within the market domain.
3) Examine whether or not the concept of utility is a positive or normative economic principle.
4) Explain the law of diminishing marginal utility.
5) State the equi-marginal principle in a two-commodity case and explain the conditions under which the
equilibrium can be destabilized and what is required for its restoration.
6) Show and outline how the cardinal utility approach can be used to derive a typical demand curve.
7) Using diagrams, distinguish between income effects for normal and inferior goods.
8) Isolate and briefly explain the income, substitution and total effects of a price fall of a Giffen good.
BBA 111 Lecture Six
 REFERENCES
 Anaman E.A., (2019). Introduction to Microeconomics. Abundant Grace Printing and Stationery.
 Begg, D, Fischer S and Dornbusch, R.(1994).Economics. 4th Edition, McGraw Hill Inc UK
 Chacoliades, M(1986) .Microeconomics.4th ed, Macmillan Publishing Hill Co. New York.
 Frank,H and Bernanke.(2004):Principles of Microeconomics;2nd Edition ,New York: McGraw-Hill.
 Lipsey, R and Crystal, A.(2007).Economics.11th Ed, Oxford University Press, Oxford.
 McConnell and Brue,S (2002).Economics: Principles, Problems and Policies. McGraw-Hill Higher Education, New York.
 Mankiw, Gregory (2005). Principles of Microeconomics. 9th Ed. Norton and Co. Inc., New York.3rd Ed. Prentice-Hall International
Inc., New Jersey.
 Ofori-Atta, Jones (1998) Introduction to Microeconomics. Woeli Publishers, Accra
 Pindyck, R.S. and Rubinfield, D.L.(1995).Microeconomics. 3rded. Prentice-Hall International Inc., New Jersey.
 Pomeyie, Paragon (2001).Microeconomics: An Introductory textbook. Wade Laurel Press, Accra.
 Essentials ofBBA
Economics, by P. Krugman,
111 Lecture Six R. Wells and K. Graddy, Worth Publishers, Second Edition.
END OF SIXTH LECTURE

BBA 111 Lecture Six