Consumer Behavior Theory Quiz

Consumer Behavior Theory

• Sellers may charge outrageous prices based on perceived consumer value.
• Consumers have the freedom to choose whether or not to pay those prices.
• Consumers buy goods and services because they derive utility or value from them.
• Utility is quantified by how much consumers are willing to pay.

Utility

• Utility is not the same as usefulness.
• Utility means only that a customer finds an item desirable enough to purchase.
• Example: A person is hungry enough to pay $3 for a hamburger even if it's the only one available.

Marginal Utility

• Marginal utility is the additional satisfaction a consumer receives from consuming one more unit of a good or service.
• As consumption increases, the marginal utility typically diminishes.

Law of Marginal Utility

• As consumers consume increasing amounts of a good or service, the satisfaction derived from each additional unit diminishes.

Total Utility

• Total utility is the overall satisfaction a consumer receives from consuming a certain number of units of a good or service.

Maximizing Utility

• People try to maximize utility by spending their limited income on goods and services that offer the most satisfaction.
• Consumers will consume to a point where the marginal utility of the good or service equals its price( MU = Price).

Utility Curve

• The utility curve demonstrates how satisfaction (TU) changes as consumption (MU) increases.
  • Phase I. A rising curve where utility increases with consumption
  • Phase II. A leveling off curve where marginal utility and thus, total utility, are maximized
  • Phase III. A declining curve where both total and marginal utility decrease with consumption

Summary of Consumer Utility

• Utility isn't inherent; it's determined by the buyer's willingness to pay.
• Individual utility functions (how much one values something) can change over time.
• There's no single, universally accepted answer for the utility of a specific item.