Theory Of Consumer Behavior PDF

Prepared by: Prof. Rebecca T. Gorospe  Isthe term for satisfaction in economics. It is the objective of every consumer. RTG  Assumes that satisfaction is measurable in units called utils. It supposes that people while purchasing or consuming goods and servi...

Prepared by: Prof. Rebecca T. Gorospe  Isthe term for satisfaction in economics. It is the objective of every consumer. RTG  Assumes that satisfaction is measurable in units called utils. It supposes that people while purchasing or consuming goods and services are subconsciously estimating the satisfaction they derived out of the said consumption. RTG  Each of the consumers may have their own scale to measure utility. A person has the liberty to make his own scale in measuring his own satisfaction. RTG  Is the additional satisfaction derives from consuming an extra piece. RTG  Is the sum of all the marginal utility he gets from consuming successive amount of the said food. RTG UNITS TOTAL MARGINAL TOTAL MARGINAL CONSUMED UTILITY UTILITY UTILITY UTILITY 1 100 Utils 100 utils 50 utils 50 utils 2 150 50 75 25 3 170 20 80 5 4 180 10 80 0 5 180 0 78 -2  In concrete terms, total utility will continue to increase so long as the marginal utility is positive. At the point of satisfaction, where the marginal utility is equal to zero, total utility remains the same. When the consumer begins to feel disutility or dissatisfaction, total utility declines. Beyond this point, any additional consumption will lead to lesser and lesser total utility. RTG  Explain why people don’t consume more than what can satisfy them. It suggests that a person’s additional satisfaction or his marginal utility declines as he consumes more and more of a particular commodity during some specified period of time.  However, any addiction, obsession to a good or service or set completion cases are exception to the law. RTG  Aside from taste and preferences that the utility schedule already reflects prices of the goods or service as well as the consumer’s budget for that commodity serve as important elements that are involved in the process of making a rational choice.  Consumer balance their selection of goods and services in order to achieve equilibrium. RTG  Approach stressed that ordinal ranking of preference among the goods and services consumers buy.  Shows a set of consumption choices, each of which yields the same amount of utility. RTG 1. It is normally negatively sloped. A downward sloping indifference curve suggests that the consumer is indifferent between two combinations of goods, where one combination may contain more units of X, but fewer units of Y and the other containing fewer units of X but more units ofY. 2. It is convex to the point of origin due to the influence of the Law of diminishing marginal utility. The more of a commodity a consumer has the less valuable an additional unit becomes, therefore, marginal utility declines. A person who has 4 sandwiches and only 1 drink might be willing to trade 2 sandwiches for an additional drink. RTG 3. Indifference curve are not-intersecting. Rational consumers are consistent with their preferences. If a consumer prefer A to B and B to C, then he also prefer A to C. RTG  ∆ in food consumption ∆in clothing consumption RTG FOOD CONSUMPTION CLOTHING MRS CONSUMPTION 56 1 46 2 -10 37 3 -9 29 4 -8 22 5 -7 16 6 -6 11 7 -5 8 8 -3 5 9 -3 3 10 -2 2 11 -1  Contains infinite points of combinations in the consumption of two commodity items that the same budget can buy at constant prices. RTG  The peso value that the consumer is willing to pay for a certain volume of a commodity item is less than the peso value of the benefit from its consumption. RTG  The paradox of value answers on How is it that water, which is very useful, that life is impossible without it, has such a low price; where as diamond which are not quite necessary have such high price. The answer lies on the equilibrium theory of supply and demand as well as the theory of diminishing marginal utility. RTG