Consumer’s Behavior Theory

Dr. Carlos L. Manapat

• Objectives
– Maximize utility for one good
– Optimize the use of 2 goods given a budget
constraint
 Utility Approach
• What is utility and how do you measure it?
– Utility refers to satisfaction and to measure
satisfaction, we use “utils”
– It may refer to ordinal number from 1-10, 10
having the most utility and 1 having the least
• The Law of Diminishing Marginal Utility states
that when a consumer uses a good or a
service, he/she tends to get less and less
satisfied. The greatest satisfaction is achieved
on the 1st unit of the said good or service.
 TU and MU
MU=change in TU/change in Q
Quantity TU MU
1 10 10
2 19 9
3 26 7 Given
4 30 4
5 30 0
6 26 -4
Maximum Utility
TU is maximum

Marginal Utiliy
Is “0”
Indifference curve and Budget Line analysis

• Indifference curve
shows the degree of
satisfaction one gets
in consuming 2
goods
• Budget line shows
what you can afford
to buy
 Optimum Combination
• The highest IC that
touches the BL at
point of tangency
• This figure shows the
different BLs and ICs. A
higher BL needs a higher IC.
• Substitution effect is the
change of the OC towards
the good which is favored or Optimum combination
sometimes the cheaper
good.
bananas

apples
• An income effect is a shift of
the BL to the right
• Giffen goods -A Giffen good
is a low income, non-luxury
product that defies
standard economic and
consumer demand theory.
• The paradox of value (also • A. Smith explained that
known as the diamond– water has more value in use
water paradox) is the and diamonds have more
contradiction that, although value in exchange.
water is on the whole more
useful, in terms of survival,
than diamonds,
diamonds command a
higher price in the market.