Learn more about Theory of Consumer Behavior

1. Theory of Consumer Behavior
Lecturer: Abas Mohamed Adawe
Chapter{3}
Learning Objectives
 Understand concept of total utility,
 Understand concept of marginal utility,
 Be able to apply the Law of Diminishing Marginal
Utility,
 Define an indifference curve and Map

2.  Introduction
The principle assumption upon which the theory of
consumer behavior and demand is built is: a consumer
attempts to allocate his/her limited money income
among available goods and services so as to maximize
his/her utility (satisfaction).

3.  Total Utility Concept
Utility - amount of satisfaction derived from the
consumption of a commodity
It is the power or capacity of a commodity to satisfy
human wants.
Useful for understanding the demand side of the
market.
If Utility in economics is cardinal and measurable,
the total utility (TU) is defined as the sum of the
satisfaction that a person can receive from the
consumption of all units of a specific product or service

4. The overall level of satisfaction derived from
consuming a good or service. It may be defined as the
sum of the utility derived from each unit consumed of
the commodity.
If consumer consumes four units of a commodity
derives U1, U2, U3, U4 utils from the successive units
consumed, then TU = U1 + U2 + U3 + U4

5. Utility is a satisfaction that a consumer derived from
consuming a commodity at a particular time
Utility is a term in economics that refers to the total
satisfaction received from consuming a good or
service. Economic theories based on rational choice
usually assume that consumers will strive to maximize
their utility. The economic utility of a good or service is
important to understand, because it directly influences
the demand, and therefore price, of that good or
service.

6. Utility Function
A utility function is an algebraic expression that
allows us to rank consumption bundles or combinations
of goods. Let’s assume that total utility is given by the
product of the quantities of goods available to
consumers. For the sake of simplicity, let’s also assume
only two commodities are available to consumers,
hamburgers and pizza.
Total utility = Qhamburgers x Qpizza

7. This approach assumes that utility is cardinally
measurable in the same sense that a ruler
measures distance. The unit of measurement
is utils, a fictitious metric.
We will learn that consumers only need to rank
alternative combinations of bundles of goods.

8. Ranking Total Utility

11.  Marginal Utility Concept
Additional satisfaction that an individual derives from
consuming an additional unit of a good or service.
It is the addition to TU derived from the consumption
of additional unity of a commodity.
MU= ∆ TU
∆ Q

12. Marginal Utility is additional satisfaction derived by
consuming extra unit of a good.
Marginal utility quantifies the added satisfaction that
a consumer garners from consuming additional units of
goods or services. The concept of marginal utility is
used by economists to determine how much of an item
consumers are willing to purchase.

13. Marginal utility is the change in utility derived from an
increase in consumption of a particular good.
MUhamburgers =  utility ÷  hamburgers
This value will fall (rise) as consumption increases
(decreases).

15.  Law of Diminishing Marginal Utility
As more and more units of a commodity are consumed,
marginal utility derived from each successive unit
goes on falling.
The Law of Diminishing Marginal Utility states that all
else equal as consumption increases the marginal
utility derived from each additional unit declines.
Marginal utility is derived as the change in utility as
an additional unit is consumed.

16. It states that the satisfaction derived from consuming
successive units of a good will diminish as total
consumption of the good increases.
That is a consumer consumes more and more units of a
specific good ,the utility from the successive unit goes
on diminishing

17. Example
Quantity Total Utility Marginal Utility
1Tine 4 4
2Tin 7 3
3Tin 8 1
4Tin 8 0
5Tin 7 -1

19.  indifference Curve
An indifference curve is the set of all combinations of
commodities X and Y that yield the same level of total
utility or satisfaction.
It is a curve representing different baskets of goods
giving the same utility to an individual.

20. The IC indicates the various combination of two
commodities which yield equal satisfaction to the
consumer.
Modern consumption theory is based upon the notion
of isoutility curves, where “iso” is the Greek for
“equal”. The consumer is assumed to be indifferent
among different combinations of goods along a iso-
utility curve.

22.  Indifference Map
A set of indifference curves is called indifference map.
An indifference map depicts complete picture of
consumer's tastes and preferences.
In an figure indifference map of a consumer is shown
which consists of three indifference curves.

24. A/Q