5 Demand and Consumer ChoiceCharles O. Cecilage fotostock

5 Demand and Consumer Choice
Charles O. Cecil/age fotostock/Superstock
Learning Outcomes
After reading this chapter, you should be able to
• Discuss the importance of utility in explaining consumer
choice.
• Derive an individual demand curve for a good based on the
equation for maximizing total utility and the
principle of diminishing marginal utility.
• Apply utility theory to explanations of consumer behavior.
• Identify and describe the concept of consumer surplus.
• Describe how advertising attempts to increase utility.
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resale or redistribution.
110
Section 5.1 Choice, Value, and Utility Theory
Introduction
Where you work, where you shop, and all over the world, there

are vending machines that
supply everything from soft drinks and snacks to emergency
footwear and newspapers. If you
think about it, you will notice a significant difference between
the machines that dispense soft
drinks and those that dispense newspapers. After you have
deposited the requisite amount
of money, the food and drink machines provide a single can or
package through a chute of
some sort, while the newspaper machine allows you to open a
door and take one paper from
a stack. Why? Are readers more honest than eaters?
This chapter will help provide an answer to this puzzle. To do
this we will look at what deter-
mines consumer choice. Since individual demand curves form
the bedrock of microeconomic
analysis, we need to consider the factors that underlie them.
The classical approach economists have taken in examining
consumer demand involves the
concept of measurable utility. We will use this approach to
examine some problems and sug-
gest some applications for demand analysis. Another approach
to consumer demand, indif-
ference curve analysis, is more advanced and beyond the scope
of this chapter.
5.1 Choice, Value, and Utility Theory
The idea that households and firms must make choices because
of scarcity is the fundamental
notion of economic analysis. We now want to expand on that
analysis to consider why con-
sumers behave the way they do. Why does a person demand a
certain good or service? An
obvious answer is that the good or service is expected to satisfy

some need or desire of the
consumer.
Economists’ view of consumer choice is based on five
assumptions about the psychology of
consumer behavior:
1. Consumers (or households) must make choices because they
have limited income
and are forced to choose which of their many wants to satisfy.
2. Consumers make rational choices when they make these
consumption decisions.
That is, they weigh costs and benefits and make the decision
that gives them the
most satisfaction.
3. Consumers make these choices with imperfect information. In
other words, they
don’t know (with certainty) all the attributes of the goods they
are choosing to
consume.
4. As increasing amounts of a good are consumed, the additional
satisfaction gained
from an additional unit becomes smaller.
5. Many goods have qualities that make them satisfactory
substitutes for other goods.
All of these statements may seem simple and obvious, but they
will enable us to draw some
powerful conclusions about the nature of demand.

111
The History of Utility Theory: The Diamond–Water Paradox
In the early development of economic theory, economists often
posed questions that they
then debated. One of the popular debate topics was what
determined value. Adam Smith
wrote that value could mean either “value in use” or “value in
exchange.” He posed (in 1776)
what became known as the diamond–water paradox:
The things that have the greatest value in use have frequently
little or no
value in exchange; and on the contrary, those which have the
greatest value
in exchange have frequently little value in use. Nothing is more
valuable than
water, but it will purchase scarce anything; scarce anything can
be had in
exchange for it. A diamond, on the contrary, has scarce any
value in use; but a
very great quantity of other goods may frequently be had in
exchange for it.
(Smith)
The diamond–water paradox was the problem that classical
economists used when they
argued that value in use could not determine price (value in
exchange). Diamonds, although
less useful than water, are more expensive than water. The
dialogue about the diamond–water

paradox went on for a long time. Many famous mathematicians,
economists, and philoso-
phers took part in the debate. The confusion over the diamond–
water paradox arose in part
over disagreement as to what the term useful meant. In the
1870s William Stanley Jevons,
Carl Menger, and Léon Walras, all writing
separately, solved the paradox by developing
a theory of value in which demand and utility
came to the forefront. Their solution played
a major role in developing the theory of con-
sumer demand.
Another part of the debate underlying the
diamond–water paradox was an argument
over whether value (or price) was deter-
mined by supply or demand. In a famous
analogy, Alfred Marshall, the great British
economist, said that one could no more say
whether supply or demand determined value
than one could say which blade of a pair of
scissors did the cutting. That is, value (or
price) is determined by the interaction of
supply and demand.
Economics in Action: Crunch Into Utility Theory
Using the classic cookie, this video bites straight into utility
theory to help us understand
the total amount of satisfaction one gains from a product despite
the diminishing marginal
utility. Check out the following clip.
https://www.youtube.com/watch?v=KOUJEyy48qY
Ingram Publishing/Thinkstock
The diamond–water paradox argues that

value in use cannot determine price.
Diamonds, for example, are arguably less
useful than water but are more expensive
than water.
https://www.youtube.com/watch?v=KOUJEyy48qY
112
We’ll consider the influence of demand on value first and leave
supply for later chapters.
Demand theorists use the notion of utility. If a consumer wants
a good or service, then that
good or service has utility for that person. Utility is the
satisfaction a consumer receives from
consuming a good or service The same good may have a great
deal of utility for one person
and none or very little for some other person. Note that in
economics, the word utility does
not necessarily mean “useful.” There are a number of items in
the real world that are not use-
ful that give great satisfaction.
Total Utility and Marginal Utility
A good unit for the measurement of utility, like the pound or
gallon or mile, does not exist.
Since utility is unique to the individual, however, an arbitrary
(and imaginary) unit called the
util can be employed. As long as no attempt is made to compare
the number of utils of dif-

ferent people, this is a satisfactory measuring device. Such
comparisons between people are
inappropriate because the number of utils is a subjective
measure of a certain individual’s
satisfaction and as such is not subject to meaningful
comparisons. (Some people prefer the
beach to the mountains!)
A relationship that expresses a person’s desire to consume
differing amounts of a good is
called a utility function. For example, suppose you try to
construct your utility function for
a certain brand of soft drink. First, choose a convenient time
period, such as a day. Then, for
one unit (one can) of soda per day, assign an arbitrary number
of utils, say 20. (You can choose
any number at all: 1, or 1,000, or 47½.) Ask yourself, if I get 20
utils from one can, how many
would I get if I consumed two cans per day? Suppose, after
much reflection, you say 38. Ask
yourself the same question about three cans per day, four, five,
six, and so on. You use these
figures to construct a utility schedule, as shown in Table 5.1.
Table 5.1: Utility schedule for soda
Cans of soda per day Total utility (utils) Marginal utility (utils)
1 20 20
2 38 18
3 54 16
4 67 13

5 77 10
6 84 7
7 88 4
8 89 1
9 87 –2
10 82 –5
113
Marginal utility (MU) is the amount of utility that one more or
one less unit consumed adds
to or subtracts from total utility. It is the change in satisfaction
provided by one more or one
less unit of consumption. The formula for marginal utility is
MU =
change in total utility
one-unit change in quantity consumed
In Table 5.1 the marginal utility is determined by calculating
how much each additional can
of soda adds to total utility. For example, the first can of soda
adds 20 utils to total utility. The

fourth can of soda adds 13 utils to total utility. Marginal utility
is found by subtracting the
total utility of consuming three sodas from the total utility of
consuming that number plus
one (67 – 54 = 13).
The Principle of Diminishing Marginal Utility
The important feature of the schedule shown in Table 5.1 is
that, although the total utility
becomes larger the more you consume per day (up to a point),
the increases to total utility
from each additional unit consumed become smaller. The fact
that additional, or marginal,
utility declines as consumption increases is called diminishing
marginal utility.
The principle of diminishing marginal utility states that the
greater the level of consump-
tion of a particular good in a given time period, the lower the
marginal utility of an additional
unit. As you consume more units of a good, the later units yield
less of an addition to total
utility than the preceding units did. For instance, the seventh
soda is expected to provide less
additional pleasure than the sixth. This principle is reflected in
Table 5.1. Marginal utility falls
from 7 utils for the sixth soda to 4 utils for the seventh.
Figure 5.1(a) shows the total utility curve plotted from Table
5.1. Figure 5.1(b) shows the
marginal utility curve that corresponds to the table. Note that
when the total utility curve
reaches its maximum, marginal utility is zero. Thereafter, each
additional unit contributes a
negative marginal utility; thus, total utility will be decreased. In
Table 5.1 total utility reaches

a maximum at eight sodas per day because the ninth soda has a
negative marginal utility.
114
Section 5.2 Utility and Consumer Behavior
5.2 Utility and Consumer Behavior
The concepts of utility and price can be combined to show how
consumers make choices in
the marketplace. Consumers are confronted with a range of
items and also a range of prices.
A consumer may not necessarily choose based solely on which
item has the greatest utility;
price and the consumer’s income are also important factors. In
other words, consumers don’t
always buy their first choice. You may prefer a Tesla to a
Toyota but decide to purchase the
Toyota. The explanation for this behavior lies in the
relationship between price and utility.
0
10
20
30
40
50
60
70
80

90
100
2
–2
–4
–6
4
6
8
10
12
14
20
18
16
1 2 3 4 5 6 7 8 9 10
0
1 2 3 4 5 6 7 8 9 10
Total
utility (utils)
Sodas/day
Total
utility
Marginal utility

Sodas/
day
(a)
(b)
Marginal
utility (utils)
Figure 5.1: Total and marginal utility
Total utility increases as consumption increases to a certain
level, in this case eight sodas per day, and
then it declines. When total utility is increasing, marginal
utility is declining, illustrating the principle
of diminishing marginal utility. At the point that total utility
begins to decline, marginal utility becomes
negative.
115
Thus, in deciding how to spend your money, you look at
marginal utility per dollar rather than
marginal utility alone. You do this because money is the
common measure of what you have to
give up. Dollars can be used to buy any available good. So for
each dollar you spend, you want

to choose the item with the highest utility per dollar. In doing
so, you economize by getting
the most satisfaction per dollar.
Maximizing Total Utility
The self-interest assumption maintains that individuals will act
to maximize their total util-
ity. To see how marginal utility and price influence how a
consumer maximizes total utility,
consider an example with only two goods, cola and pizza. A
unit of cola costs $0.50, and a
unit of pizza costs $1.00. The consumer’s utility schedules for
the two goods are presented in
Table 5.3. The consumer has a given amount of income, called a
budget constraint. A budget
constraint is a given level of income that determines the
maximum amount of goods that
may be purchased by a consumer. Let’s allow this consumer a
budget constraint of $13 and
see how that amount will be allocated between the two goods to
achieve maximum utility.
Suppose, for example, you are considering purchasing a six-
pack of soft drinks. You are pre-
sented with the three possibilities shown in Table 5.2. Coca-
Cola is your first choice because
to you it yields the most utility. But the relevant question is not
which soft drink has the most
utility but rather which has the most utility per dollar.
Therefore, you choose to buy a six-pack
of Pepsi. This choice implies that the extra satisfaction of Coca-
Cola over Pepsi is not worth
$0.75, but the extra satisfaction of Pepsi over RC Cola is worth
$0.25. There are other things
you can do with the extra $0.75. You are saying that $0.75 spent
on something other than

soda will yield more additional utils than the difference between
the utility of Coke and the
utility of Pepsi, but that $0.25 spent on other goods will not
yield more utils than spending it
on Pepsi instead of RC Cola.
Table 5.2: Hypothetical utility-per-dollar comparison
Choice Marginal utility (utils) Price (dollars)
Marginal utility per
dollar (utils)
Coca-Cola 30.0 3.75 10
Pepsi 27.0 3.00 12
RC Cola 20.0 2.75 10
116
The first dollar will be allocated to pizza because a dollar’s
worth of pizza (one piece) yields
32 utils of satisfaction compared with 29 utils for a dollar’s
worth of cola (two cans). The
next dollar will also be spent on pizza because it yields 31 utils,
which is still greater than the
first dollar’s worth of cola, the alternative purchase. In other
words, the consumer buys two
pieces of pizza before buying any cola. The third dollar is spent

on cola because the 29 utils of
satisfaction gained from purchasing two cans are greater than
the 28 utils that are yielded by
a third piece of pizza. The process continues until the entire
income of $13 is spent. In maxi-
mizing total utility, the consumer will spend $5 on 10 cans of
cola and $8 on eight pieces of
pizza. This allocation produces 300 utils of satisfaction—the
maximum total utility that can
be purchased with $13 of income. You cannot find a different
combination of cola and pizza
that will produce more satisfaction (try reducing cola
consumption by two cans and increas-
ing pizza consumption by one piece, or vice versa).
The consumer’s choices are based on a maximization rule that
says that total utility is maxi-
mized when the last dollar spent on good A yields the same
utility as the last dollar spent on
good B. In algebraic form, total utility is maximized when
Marginal utility of good A
Price of good A
=
Marginal utility of good B
Price of good B
This can be written
MUA
PA
=
MUB

PB
Table 5.3: Utility for a consumer of two goods
Cola Pizza
Quantity
per week
(cans)
Marginal
utility,
MU
(utils)
MU/P (P
= $0.50)
Total
utility,
TU
(utils)
Quantity
per week
(pieces)
Marginal
utility,
MU
(utils)
MU/P (P
= $1.00)

Total
utility,
TU
(utils)
1 15 30 15 1 32 32 32
2 14 28 29 2 31 31 63
3 13 26 42 3 28 28 91
4 12 24 54 4 24.75 24.75 115.75
5 11 22 65 5 20.25 20.25 136
6 10.75 21.5 75.75 6 18 18 154
7 10.25 20.5 86 7 17 17 171
8 10 20 96 8 16 16 187
9 9 18 105 9 14 14 201
10 8 16 113 10 12 12 213
11 7 14 120 11 11 11 224
12 6.5 13 126.5 12 9 9 233
117

The marginal utility of a can of cola, when 10 cans per week are
consumed, is 8 utils, and the
price of a can is $0.50. Thus,
MUcola
Pcola
=
8
$0.50
= 16 utils per dollar
For pizza, at the optimum consumption rate, the marginal utility
is 16, and the price is $1.
Thus,
MUpizza
Ppizza
=
16
$1.00
= 16 utils per dollar
Of course, individuals don’t spend all their income on goods.
Sometimes individuals hold
money as they do any other commodity. Including money
(symbolized by $), the equation for
maximization of utility is
MUA
PA

=
MUB
PB
=
MU$
P$
Utility maximization is the process by which a consumer adjusts
consumption, given a bud-
get constraint and a set of prices, in order to attain the highest
total amount of satisfaction.
The equation above is an expression for utility maximization. It
includes all commodities,
even money. This equation says that in order to maximize total
utility, the marginal utilities
per dollar of all goods consumed have to be equal and also have
to equal the marginal utility
of money. If this is not the case, a change in the consumption
pattern can produce more satis-
faction for a given budget constraint. This equation is just a
formal way of saying that people
allocate their income so as to yield the most satisfaction
possible. When utility is being maxi-
mized, the additional satisfaction from any use of a dollar will
equal the additional satisfac-
tion from any other use of that dollar. When this is not the case,
the consumer can reallocate
personal income from one good to another and gain more
satisfaction.
To see how a given consumption pattern can be adjusted to
achieve maximum utility, look
again at Table 5.3. Let’s give Shandra an income of $9 and say
that she uses it to buy $3 worth

of cola and $6 worth of pizza. The expression
MUcola
Pcola
=
MUpizza
Ppizza
doesn’t hold because
10.75
0.50
>
18
1
Shandra isn’t maximizing her utility, because the last dollar she
spent on cola yielded more
utils than the last dollar she spent on pizza. Shandra should
reallocate her consumption out-
lays. By giving up a dollar’s worth of pizza, she will lose 18
utils. But she will gain 20.25 utils
by spending that dollar on more cola. Her total utility will thus
rise by 2 (rounded off ), and
10
0.50
<
20.25

1
118
Now suppose the price of good x falls to P2. This change throws
the expression out of equi-
librium because the denominator on the left side is now smaller,
making the left side of the
expression larger.
To get back into equilibrium, the consumer has to lower the
value of the left side of the
expression and/or raise the value of the right side. How can this
be done? If the individual
consumes more of x, MUx will decline because of the principle
of diminishing marginal utility.
As consumption moves to x2 on Figure 5.2, the marginal utility
of good x falls. Furthermore,
consuming more of x will mean some reduction in the
consumption of y. As consumption of
y falls, MUy rises.
By purchasing eight cans of cola and five pieces of pizza,
Shandra is maximizing utility with a
$9 budget constraint.
Marginal Utility and the Law of Demand
Utility theory makes it possible to derive a consumer’s demand

curve for a good (good x).
Suppose there are only two goods, x and y. Remember, demand
curves are drawn assuming
everything else remains the same. That is, income, tastes, and
the prices of all other goods
(good y) are held constant. The consumer is initially in
equilibrium, maximizing utility when
MUx
Px
=
MUy
Py
At this equilibrium, MUx1 corresponds to the consumption of
x1 units of good x in Figure 5.2.
The price of x1 units is represented by P1 in Figure 5.2.
0
Price
Quantity/
time period
P
1
P
2
x
1
x

2
D
x
Figure 5.2: Demand curve for good x
When price falls from P1 to P2, the consumer’s utility
maximization is thrown out of equilibrium.
Equilibrium will be restored if the consumer increases
consumption to x2.
119
Utility-maximizing behavior requires that when the price of
good x falls (as from P1 to P2 in
Figure 5.2), the consumer will increase consumption of x. Since
this is necessary for utility
maximization, it demonstrates that the demand curves of
individuals must have a negative
slope. That is, the lower the price of a good, the greater the
quantity demanded.
Problems With Utility Theory
There are two major problems with a demand theory based on
utility. The first problem is
that some goods are not divisible. The second, more serious
problem is that utility cannot be
measured.

The theory works well enough to describe the consumption of
certain kinds of goods, such as
soft drinks or pizzas. When the good being consumed is an
automobile or a home, however,
it is difficult to talk about additional units because the purchase
is “lumpy.” It is very difficult
to consume a part of a house or a part of a car, but it is common
to consume part of a six-pack
of cola.
This problem with utility theory is really not a major flaw.
Consumers can still make adjust-
ments with most lumpy purchases. Consider a house as an
example. Suppose the consumer
decides after the purchase that the house is too large and that
other purchases would yield
more marginal utility. Over time, expenditures on the house can
be lowered by a lessening of
routine maintenance so that more can be spent on the other
goods that yield a higher mar-
ginal utility. Buying a smaller house, buying one at a less
desirable location, and renting are
also available alternatives.
A greater problem with utility theory is that it is impossible to
measure utility. We have pro-
ceeded as if there were a way we could strap a meter to a
consumer and exactly measure the
utility expected from consuming one more unit, somewhat like
measuring temperature or
blood pressure. This is, of course, not possible. But before you
reject utility theory as useless,
remember that it is a theoretical tool. It really isn’t that
important for the theory of demand to
be able to measure utility. The purpose of utility theory is to

develop a better understanding
of why and how quantity demanded will change when prices
change.
Check Point: Utility Theory
• Assumptions of model
Individual has budget constraint.
Individual gets utility from consumption.
Marginal utility diminishes as consumption rises.
• Maximization
Utility is maximized when the marginal utility per dollar spent
on all goods (and the
marginal utility of money) is equal.
• There are testable implications.
Quantity demanded is inversely related to price, ceteris paribus.
As the price of good rises, the demand for substitutes will
increase, ceteris paribus.
As income rises, the demand for normal goods will increase,
ceteris paribus.
120
Income and Substitution Effects
The law of demand, which you studied in Chapter 3, states that
as the price of a good or ser-
vice declines, the quantity demanded increases, all else being

equal. This law is true because
of two effects that result from the price decline.
Policy Focus: Progressive Income Taxation—Are Utility
Functions Interdependent?
Many noneconomists believe that money and income are subject
to diminishing marginal
utility. This idea is one of the main arguments (but certainly not
the only one) for a
progressive income tax. A progressive tax takes a larger
percentage of dollars from those
earning high incomes, because for them a dollar’s marginal
utility is thought to be low.
A smaller percentage of dollars is taken from those taxpayers
earning lower incomes,
because for them a dollar’s marginal utility is thought to be
much higher. This argument
assumes that it is possible to measure utility and to make
interpersonal utility comparisons.
Such comparisons are attempts to measure the utility of one
individual relative to that of
another. One way to avoid directly comparing utilities for
different people is to assume that
individuals all have the same utility schedule for given levels of
income. With these two
assumptions, proponents of the progressive income tax argue
that society can maximize
total utility by taking income away from high-income
individuals, who have lower marginal
utilities of income, and transferring it to low-income
individuals, who have higher marginal
utilities of income.
Those who apply principles of individual utility maximization
to a society as a whole are on

very shaky ground, however. First, economists generally believe
that interpersonal utility
comparisons are not feasible. People are different. There is no
way you can prove that an
additional $100 of income gives less satisfaction to actress
Jennifer Lawrence than to an
unemployed autoworker. In fact, Lawrence might get more
satisfaction from being an expert
consumer. It is impossible to prove that one individual gets
more or less satisfaction from an
income increment than any other individual does.
A second and more fundamental problem with this analysis is
that it assumes a diminishing
marginal utility for income, or goods and services in general.
This proposition cannot be
proved. The principle of diminishing marginal utility, you will
remember, states that the
marginal utility of a particular good declines as consumption is
increased. Increased income,
however, represents an increase in the consumption of all
goods. If wants are insatiable,
there is no reason to believe that the principle of diminishing
marginal utility holds for
money or income. Even so, it is probably the case that most
people think that income has
diminishing marginal utility. What do you think?
There may be other arguments for progressive income taxes. In
other cases, when income is
very unequally distributed, the only substantial source of
revenue for the government to tap
may be income taxes on the very wealthy. There may be
subjective interpretations of what is
equitable or fair that go way beyond the scope of economics.
All economics has to say on the

subject is that diminishing marginal utility is not a valid
argument for progressive income
taxation.
121
Section 5.3 Some Applications of Utility Theory
The first effect is called the substitution effect. When the price
of a good (or service) falls,
the good becomes less expensive relative to all other goods. As
a result, consumers purchase
more of it because it has become a better substitute for other
goods as it has become cheaper.
Steaks and ground beef provide a good example. As the price of
steak falls, more people will
switch from ground beef to steaks.
The second effect of a price decline is called the income effect.
When the price of a good or
service falls, all else being equal, the consumer’s real income,
or purchasing power, rises. That
is, after buying the same amount as before (of the good for
which price has fallen), the con-
sumer has more income left over. With this higher real income,
more of all normal goods will
be consumed. Thus, the consumption of the good whose price
declined also will increase (if
it is a normal good). Income and substitution effects, along with
diminishing marginal utility,
explain why demand curves slope down from left to right.

5.3 Some Applications of Utility Theory
You have practiced and observed utility maximization in your
own life even though you may
not have thought of it in the formal language of economics.
Suppose, for example, you are
organizing the wine concession for an alumni event. There are
two ways to run the conces-
sion: You can charge an admission fee to the event and then
allow unlimited consumption, or
you can charge a set price for each glass of wine, say $5. Utility
theory predicts different levels
of consumption for these two alternatives and thus different
requirements for planning the
supply. In the first case, wine drinkers will consume wine until
the marginal utility per glass
is zero, because the price per additional glass is zero. In the
second case, wine drinkers will
consume wine until the marginal utility per glass equals the
marginal utility of $5. You can
predict, then, that there will be more drunken behavior if the
party is financed by an admis-
sion charge.
This example may seem insignificant because the consumption
of wine isn’t a very earth-
shaking issue. Let’s change the good from wine to medical
services. If the government were
to provide free national health care, what do
you predict would happen to the consump-
tion of these services? People would con-
sume them until the marginal utility of the
last unit is zero. This is exactly what tends
to happen with a prepaid or tax-financed
health care system.

Take, for example, the Affordable Care Act
of 2010. Census data from 2016 indicated
that the overall rate of uninsured individu-
als had reached a new low of 9.1%. White
House economic advisers issued a joint
statement that said, “Every State has seen
declines in its uninsured rate since 2013 as
the major coverage provisions of the Afford-
able Care Act have taken effect” (Goldstein,
monkeybusinessimages/iStock/Thinkstock
Utility maximization is practiced and observed
in everyday life. For example, utility theory can
help predict what might happen if the govern-
ment were to provide free national health care.
122
Section 5.3 Some Applications of Utility Theory
2016, para. 8). Although the number of visits to hospitals and
community health centers
increased, as expected, these additional visits were primarily for
adults receiving preventive
care. A recent study found that among Medicare fee-for-service
patients, the annual use of
preventive visits, like cancer screenings, rose from 1.4% before
the implementation of the
Affordable Care Act to 27.5% afterward (Chung et al., 2015).
Preventive visits are far less

costly than urgent or emergency visits later on, which led to
slower growth in health care
costs (Schoen, 2016). It is important to recognize that utility
theory was able to predict an
increase in the consumption of health care services but not
necessarily the type of services,
which means that it only helps us understand one aspect of such
a policy change.
The Diamond–Water Paradox Explained
Adam Smith (and others) argued that utility (and thus demand)
could not be a determinant
of price because diamonds, while less useful than water, are
more expensive than water. The
paradox disappears if we distinguish between total utility and
marginal utility. The total util-
ity of water is high. However, since there is a great deal in
existence and large quantities
are consumed, its marginal utility is low. The total utility of
diamonds, on the other hand, is
relatively low. However, since diamonds are rare, their marginal
utility is high. Price, then, is
determined by marginal utility, not total utility. Economists say
that marginal utility deter-
mines value in exchange (price) and that total utility determines
value in use. Price, then, is
related to scarcity through utility. If something has a low
marginal utility at all quantities con-
sumed, it will have a low price, regardless of how scarce it is. If
something is relatively scarce
and has a high marginal utility, it will be valuable and thus
expensive.
Shopping for Bargains
Economists have used the concept of utility-maximizing
behavior to analyze shopping behav-

ior. The idea is that a buyer will search for bargains until the
expected savings in value or util-
ity equals the cost of continued searching.
Several predictions can be made from this theory. The first is
that the larger the amount indi-
viduals expect to save, the longer they will continue to search.
In other words, the bigger the
item in terms of your budget, the more you will shop around.
You will search longer for a good
price on a car than for a good price on a loaf of bread. You
might even buy bread at a convenience
store, where you know the price is higher, to save some
shopping time. The second prediction
is that, in percentage terms, the variation in prices for bigger
budget items should be smaller
than the variation in prices for smaller budget items. The search
process will drive high-price
sellers of large items out of business or force them to reduce
their prices. The third prediction
is that when search costs are higher, price differences between
sellers could be higher without
driving the high-priced sellers out of business. Have you ever
noticed that prices of gasoline
123
Section 5.4 Consumer Surplus and Utility
5.4 Consumer Surplus and Utility
Consumers often benefit in a market economy because they are

able to purchase a good or
service by sacrificing something that is worth less to them than
the value of what they receive.
Consumer surplus is the extra utility derived from a purchase
that has a value to the con-
sumer greater than the market price. Utility theory provides a
measure of consumer surplus.
Consider the demand curve for a single consumer in Figure 5.3.
At price P1 the individual will
consume Q1 units of the good. According to the theory of
utility-maximizing behavior, the
marginal utility of the last unit purchased is equal to the price
of the unit. This means that
the marginal utility of each previous unit purchased was greater
than price P1. The consumer
would have been willing to pay higher prices for those previous
units, so at the market price
of P1 the consumer receives a bonus in terms of utility on all
units but the last one. The total
purchase is worth more to the consumer than the total amount
(price times quantity) that is
paid. This extra utility gained is called consumer surplus and is
represented by the shaded
area in Figure 5.3. Consumer surplus will be an important
concept when we study monopoly.
The next Global Outlook box describes an application of
consumer surplus in international
trade.
are higher near freeways than in towns? Utility-maximizing
theory can explain this phenom-
enon. Users of freeways are going somewhere, often in a hurry.
Their search costs are high.
They therefore do less shopping around and as a result pay
higher prices.

The Internet plays an important role by drastically reducing
search costs, which may also
have an impact on prices and buying behavior. Price comparison
websites like GoSale.com
and PriceGrabber now do the work for consumers by providing
prices from a variety of sell-
ers at the click of a button. Chiou and Pate (2010) found
evidence of greater searching by
price-sensitive shoppers, which generally leads to lower prices
for all goods on the Internet.
Economics in Action: Follow Your Cravings
The Khan Academy explains marginal utility through chocolate
bars and fruits. As an
individual craves more chocolate and fruit, he or she will
consider the satisfaction of each
product individually and against each other. When price gets
involved, marginal utility helps
the individual decide how to gain the most “bang for the buck.”
Find out for yourself by
visiting the Khan Academy website
(http://www.khanacademy.org), and then searching for
the video “Marginal Utility and Total Utility.”
http://www.khanacademy.org
124
Section 5.5 Advertising, Marketing, and Demand

5.5 Advertising, Marketing, and Demand
The theory developed in this chapter explains a great deal about
demand and consumer equi-
librium. It does not say anything about the role of advertising
and marketing. Advertising and
marketing are difficult topics for economists
to deal with because economic analysis usu-
ally assumes that consumers are informed,
rational utility maximizers who know their
own tastes and preferences. Advertising
and marketing are not, however, inconsis-
tent with those basic assumptions.
Advertisers spend a great deal of time trying
to alter consumers’ tastes and perceptions.
If enough tastes and perceptions can be
changed that the average consumer’s util-
ity from the firm’s product can be increased,
more will be demanded. Changes in tastes
do not mean that the consumer is not ratio-
nal. Even without advertising, tastes would
change over time with changes in age, edu-
cation, and other factors. Some tastes even
change regularly with the change of season.
0
Price
Consumer
surplus
Quantity/
time period
P

1
Q
1
D
Figure 5.3: Consumer surplus
The consumer surplus is the shaded area above the price P1 and
below the demand curve.
Richard Levine/Corbis News/Getty Images
Advertisers spend a great deal of time trying to
alter consumers’ tastes and perceptions. Much
advertising is directed toward making consum-
ers demand more by convincing them that
other products are not satisfactory.
125
Section 5.5 Advertising, Marketing, and Demand
Global Outlook: Pity the Poor Japanese Consumer!
Although the average applied tariff rate in Japan is one of the
lowest in the world, the country
still places high tariffs on food products to protect an efficient
and powerful political lobby in
Japan called the Japan Agriculture Group. In 2017 Japan had
tariff rates of 0.1% on electrical

machinery and 2.2% on chemicals, but a tariff of 12.9% on
agriculture products (Export.gov,
2017). Protectionists, or people who advocate shielding a
country’s domestic industries from
foreign competition, would insist that Japan should not join the
trade partnership unless
it can maintain high protective tariffs on the five “sacred”
products: rice, wheat, beef and
poultry, dairy, and sugar.
American rice farmers complain bitterly to the U.S. government
about tariffs such as those
set by Japan. In fact, U.S. producers of goods that the Japanese
export to the United States
use these high tariffs in Japan as an argument that the United
States should impose tariffs on
Japanese goods to create a “level playing field.” Let’s examine
the effect of Japanese tariffs on
Japanese consumers.
Tariffs have many effects. They reduce the efficiency of
resource allocation. They redistribute
income between countries and between producers and
consumers within countries. They
raise revenue for the countries that impose them. All of the
economic effects of tariffs are
important and will be discussed in the chapter on international
trade. It is possible, however,
to use the concept of consumer surplus developed in this
chapter to see how tariffs affect the
well-being of Japanese consumers.
What happens if the government imposes a tariff ? A tariff
permits domestic producers to sell
more of a product at a higher price, and government revenues
rise by the amount of the tariff

times the imported quantity. However, consumers experience a
decline in consumer surplus.
The citizens that suffer the most from tariffs are the country’s
own domestic consumers.
The problem is that they are not an effective lobbying group,
while Japanese farmers are.
Given what we know about economics, what would we expect to
see? In recent years a small
but growing number of Japanese consumers and businesses are
doing what economics
would predict: abandoning their loyalty to expensive, premium-
grade homegrown rice and
switching to cheaper alternatives from China, Australia, and the
United States (Tabuchi,
2012). If this trend continues, the downward pressure on
domestic prices may lead Japanese
farmers to rethink their strategy.
Economics in Action: Japanese Farmers Reject Free Trade
Farmers in Japan meet and discuss the future of agricultural
trade and the impact of rising
food prices globally. See more here:
https://www.youtube.com/watch?v=9Dn-fFsivEI.
https://www.youtube.com/watch?v=9Dn-fFsivEI
126
Conclusion

Conclusion
You should now be able to explain why the vending machine
technology is different for
newspapers than it is for food and drink. It surely has nothing to
do with technology. It
would be easy to have the paper delivered to you in the same
way a pack of Skittles comes
out of the machine. The explanation is in marginal utility
analysis. Newspaper companies
know that for most people the marginal utility of the second
paper is zero—maybe even
negative because you have to get rid of it. So most people will
be honest. Have you ever
taken a second paper when you only paid for one? If you did,
perhaps the reason was that
you anticipated that you would have to share the paper, and as a
result the second paper had
positive utility. It is easy for newspapers to “trust” the honesty
of people because the second
unit of what they sell is “worthless.”
Key Ideas
1. Total utility is the total amount of satisfaction expected from
consuming an item.
Marginal utility is the change in total utility from consuming
one more or one less
unit of a good.
2. Consumers, in deciding among items, choose those items with
the highest marginal
utility per dollar. An individual maximizes total utility by
consuming all items so
that their marginal utilities per dollar spent are equal. When the
price of a good or
service falls, the quantity demanded increases because of

income effects and substi-
tution effects.
3. Marginal utility determines value in exchange (price), and
total utility determines
value in use.
4. Consumer surplus is the extra utility derived from a purchase
that has a value to
the consumer that is greater than the price paid. In this sense,
consumer surplus is
bonus utility to the consumer.
5. If advertising can change tastes and perceptions, the utility a
consumer gets from
the advertised product will increase.
Critical-Thinking Questions
1. How is the diamond–water paradox useful in explaining the
difference between a
useful good and a good that has utility?
2. What is diminishing marginal utility, and why is it
important?
3. How does the presence of a budget constraint limit the
maximum utility possible?
4. What is consumer surplus, and how is it related to utility?
5. The topics in this chapter discuss rational consumer behavior.
Is it ever rational to be
irrational?
6. How does the presence of outlet stores impact consumer
surplus?
7. If the developers of the Microsoft Surface tablet use flashy
advertising to increase

sales, how are they trying to impact consumer utility?
8. The marginal utility of one good is 3 and its price $4.00, and
the marginal utility of
another good is 6 and its price $2.00. According to consumer
choice, based on the
maximization rule, is the consumer maximizing utility? Explain.
9. Observers of the wealthy often comment on the fact that they
tend to waste a lot of
things, like food, but are very careful in their use of time. Is
this irrational behavior?
127
Conclusion
budget constraint A given level of income
that determines the maximum amount of
goods that may be purchased by a consumer.
consumer surplus The extra utility derived
from a purchase that has value to the con-
sumer greater than the market price.
diamond–water paradox The fact that dia-
monds, although less useful than water, are
more expensive than water; that is, things
with the greatest value in exchange (price)
often have little value in use.

income effect An increase in demand for
a good (or service) when its price falls,
ceteris paribus, because the household’s real
income rises and the consumer buys more of
all normal goods.
marginal utility (MU) The amount of
utility that one more or one less unit of
consumption adds to or subtracts from total
utility.
principle of diminishing marginal utility
The fact that the additional utility declines
as quantity consumed increases. Less sat-
isfaction is obtained per additional unit as
more units are consumed.
substitution effect An increase in the
quantity demanded of a good (or services)
because its price has fallen and it becomes a
better substitute for all other goods.
util An arbitrary unit used to measure indi-
vidual utility.
utility The satisfaction that a consumer
receives from consuming a good or service.
utility function A relationship expressing
a consumer’s desire to consume differing
amounts of a good.
utility maximization The process by which
a consumer adjusts consumption, given
a budget constraint and a set of prices, in

order to attain the highest total amount of
satisfaction.
10. If your rent doubles in one year, what happens to your
budget constraint? How
would this change the quantity and types of goods you
purchase?
11. What would you expect to happen to a normal consumer’s
total utility for steak if
the surgeon general confirmed a link between the consumption
of beef and certain
cancers?
12. When restaurants offer all-you-can-eat buffets, they
typically have restrictions. What
restrictions might they want to impose, and how are these
related to utility theory?
13. If the government wanted to propose a more progressive tax
system, how could it try
to use the concept of diminishing marginal utility in its
argument?
14. Does advertising increase or decrease the utility you receive
from consuming certain
goods? Is this good or bad? Should certain types of advertising
be regulated by the
government?
15. How would a university policy to make food on campus
more affordable for students
impact the university’s utility? Are there other positive
outcomes?
Key Terms

Motivation theories
We can distinguish between contentand processmotivation
theories. Content theories focus on
WHAT, while process theories focus on HOW human behaviour
is motivated. Content theories
are the earliest theories of motivation. Within the work
environment they have had the greatest
impact on management practice and policy, whilst within
academic circles they are the least
accepted. Content theories are also called needs theories: they
try to identify what our needs are
and relate motivation to the fulfilling of these needs. The
content theories cannot entirely explain
what motivate or demotivate us. Process theories are concerned
with “how” motivation occurs,
and what kind of process can influence our motivation.
The main content theories are: Maslow’s needs hierarchy,
Alderfer’s ERG theory,
McClelland’s achievement motivation and Herzberg’s two-
factor theory.

The main process theories are: Skinner’s reinforcement theory,
Victor Vroom's expectancy
theory, Adam’s equity theory and Locke’s goal setting theory
(Figure 1).
No single motivation theory explains all aspects of people’s
motives or lack of motives. Each
theoretical explanation can serve as the basis for the
development of techniques for motivating.
Figure 1. Motivation theories (Source: Author's own figure)
Maslow – hierarchy of needs
This is the earliest and most widely known theory of
motivation, developed by Abraham Maslow
(1943) in the 1940s and 1950s.
This theory condenses needs into five basic categories. Maslow
ordered these needs in his
hierarchy, beginning with the basic psychological needs and
continuing through safety,
belonging and love, esteem and self-actualization (Figure 2). In
his theory, the lowest unsatisfied
need becomes the dominant, or the most powerful and
significant need. The most dominant need
activates an individual to act to fulfil it. Satisfied needs do not
motivate. Individual pursues to
seek a higher need when lower needs are fulfilled.
Maslow's hierarchy of needs is often shown in the shape of a
pyramid: basic needs at the bottom
and the most complex need (need for self-actualization) at the

top. Maslow himself has never
drawn a pyramid to describe these levels of our needs; but the
pyramid has become the most
known way to represent his hierarchy.
Figure 2. Maslow’s Hierarchy of Needs (Source: Author's own
figure)
1. Physiological needs (e.g. food, water, shelter, sleep)
It includes the most basic needs for humans to survive, such as
air, water and food. Maslow
emphasized, our body and mind cannot function well if these
requirements are not fulfilled.
These physiological needs are the most dominant of all needs.
So if someone is missing
everything in his/her life, probably the major motivation would
be to fulfil his/her physiological
needs rather than any others. A person who is lacking food,
safety, love (also sex) and esteem,
would most probably hunger for food (and also for money,
salary to buy food) than for anything
else.
If all the needs are unsatisfied, and the organism is then
overruled by the physiological needs, all
other needs may turn into the background. All capacities are put
into the attendance of satisfying

hunger. Any other things are forgotten or got secondary
importance.
2. Safety and security (secure source of income, a place to live,
health and well-being)
If the physiological needs are relatively well contented, new
needs will appear, the so called
safety needs. Safety needs refer to a person’s desire for security
or protection. Basically
everything looks less important than safety and protection (the
physiological needs even
sometimes). The healthy and fortunate adults in our culture are
largely satisfied in their safety
needs. The peaceful, sure, safety and unwavering society makes
us feel in safety enough from
criminal assaults, murder, unbelievable natural catastrophes,
and so on. In that case people no
longer have any safety needs as first-line motivators.
Meeting with safety needs demonstrated as a preference for
insurance policies, saving accounts
or job security, etc., we think about the lack of economic safety.
Children have a greater need to
feel safe. That is the reason why this level is more important for
children.
Safety and security needs include: Personal security; Financial
security; Health and well-being;
Safety mesh against accidents, illnesses and their adverse
impacts.
To tell the truth, in real dangers and traumas – like war, murder,
natural catastrophes, criminal
assault, etc. -, the needs for safety become an active, first-line
and dominant mobilizer of human

beings.
3. Belongingness and love (integration into social groups, feel
part of a community or a group;
affectionate relationships)
If both the physiological and the safety needs are fulfilled, the
affection, love and belongingness
needs come into prominence. Maslow claimed people need to
belong and accepted among their
social groups. Group size does not mean anything: social groups
can be large or small. People
need to love and be loved – both sexually and non-sexually – by
others. Depending on the power
and pressure of the peer group, this need for belonging may
overbear the physiological and
security needs.
Love needs involve giving and receiving affections (love is not
synonymous with sex – sex is a
physiological need). When they are unsatisfied, a person will
immediately eliminate the lack of
friends, peers and partner. Many people suffer from social
nervousness, loneliness, social
isolation and also clinical depression because of the lack of this
love or belongingness factor.
4. Esteem (respect for a person as a useful, honourable human
being)
In our society most people long for a stable and high valuation
of themselves, for the esteem of
others and for self-respect or self-esteem.

Esteem means being valued, respected and appreciated by
others. Humans need to feel to be
valued, such as being useful and necessary in the world. People
with low self-esteem often need
respect from others. Maslow divided two types of esteem needs:
a ‘lower’ version and a ‘higher’
version. The ‘lower’ version of esteem is the need for respect
from others: for example attention,
prestige, status and loving their opinion. The ‘higher’ version is
the need for self-respect: for
example, the person may need independence, and freedom or
self-confidence.
The most stable and therefore the healthiest self-esteem is based
on respect from others. External
fame or celebrity and unwarranted adulation won’t cause self-
esteem, although you feel better
for a while.
5. Self-actualization (individual’s desire to grow and develop to
his or her fullest potential)
‘What humans can be, they must be.’ (Maslow, 1954)
Self-actualization reflects an individual’s desire to grow and
develop to his/her fullest potential.
People like opportunities, choosing his/her own versions,
challenging positions or creative tasks.
Maslow described this level as the ‘need to accomplish
everything that one can, to become the
most that one can be’. Maslow believed that people must
overcome their other needs – described
above -, not only achieve them. At this level, individual
differences are the largest.

As each level is adequately satisfied, we are then motivated to
satisfy the next level in the
hierarchy, always new and higher needs are coming. This is
what we mean, when the basic
human needs are drawn like a pyramid, a hierarchy. Life
experiences, including divorce and loss
of job, may cause an individual to fluctuate between levels of
the hierarchy. These five different
levels were further sub-categorised into two main groups:
deficiency and growth needs.
Deficiency needs – The very basic needs for survival and
security.
These needs include:
• physiological needs
• safety and security needs
• social needs – belongingness and love
• esteem needs
It may not cause a physical indication if these ‘deficiency
needs’ are not fulfilled, but the
individual will feel anxious and tense. So the most basic level
of needs must be fulfilled before a
person wants to focus on the secondary or higher level needs.
Growth needs – Personal growth and fulfilment of personal
potential.
These needs include:

• self-actualisation needs
This hierarchy is not as rigid as we may have implied. For
example, there are some humans for
whom self-esteem or self-actualization seems to be more
important than love or belonging. The
popularity of this theory of motivation rooted in its simplicity
and logic.
Alderfer – ERG theory: Existence needs, relatedness needs and
growth needs
Alderfer (Furnham, 2008) distinguished three steps or classes of
needs: existence, relatedness
and growth. Maslow’s physiological and safety needs belong
together to existence needs.
Relatedness can be harmonised to belongingness and esteem of
others. Growth is the same as
Maslow’s self-esteem plus self-actualization. Both Maslow and
Alderfer tried to describe how
these needs, these stages of needs become more or less
important to individuals.
• Existence needs: These include needs for basic material
necessities. In short, it includes an
individual’s physiological and physical safety needs.
• Relatedness needs: Individuals need significant relationships
(be with family, peers or
superiors), love and belongingness, they strive toward reaching
public fame and recognition.
This class of needs contain Maslow’s social needs and external
component of esteem needs.

• Growth needs: Need for self-development, personal growth
and advancement form together
this class of need. This class of needs contain Maslow’s self-
actualization needs and intrinsic
component of esteem needs.
Alderfer agreed with Maslow that unsatisfied needs motivate
individuals. Alderfer also agreed
that individuals generally move up the hierarchy in satisfying
their needs; that is, they satisfy
lower-order before higher-order needs. As lower-order needs are
satisfied, they become less
important, but Alderfer also said: as higher-order needs are
satisfied they become more
important. And it is also said that under some circumstances
individuals might return to a lower
need. Alderfer thought that individuals multiply the efforts
invested in a lower category need
when higher categorized needs are not consequent.
For example there is a student, who has excellent grades,
friends, and high standard of living,
maybe also work at the university. What happens if this
individual finds that he or she is
frustrated in attempts to get more autonomy and responsibility
at the university, maybe also more
scholarship that generally encourage individuals’ growth?
Frustration in satisfying a higher
(growth) need has resulted in a regression to a lower level of
(relatedness) needs (‘I need just my
friends, some good wine, I do not want to go to the university
anymore.’).

This event is known and called as the frustration-regression
process. This is a more realistic
approach as it recognises that, because when a need is met, it
does not mean it will always
remain met. ERG theory of motivation is very flexible: it
explains needs as a range rather than as
a hierarchy. Implication of this theory: Managers must
understand that an employee has various
needs that must be satisfied at the same time. ERG theory says,
if the manager concentrates only
on one need at a time, he or she won’t be able to motivate the
employee effectively and
efficiently. Prioritization and sequence of these three
categories, classes can be different for each
individual.
McClelland – Need for achievement, affiliation and power
In the early 1960s McClelland – built on Maslow’s work –
described three human motivators.
McClelland (Arnold et al., 2005) claimed that humans acquire,
learn their motivators over time
that is the reason why this theory is sometimes called the
‘Learned Needs Theory’. He affirms
that we all have three motivating drivers, and it does not depend
on our gender or age. One of
these drives or needs will be dominant in our behaviour.
McClelland’s theory differs from Maslow’s and Alderfer’s,
which focus on satisfying existing
needs rather than creating or developing needs. This dominant
motivator depends on our culture
and life experiences, of course (but the three motivators are
permanent). The three motivators
are:

• achievement: a need to accomplish and demonstrate
competence or mastery
• affiliation: a need for love, belonging and relatedness
• power: a need for control over one’s own work or the work of
others
These learned needs could lead to diversity and variety between
employees. More precisely,
prioritization and importance of these motivational needs
characterises a person’s behaviour. As
we wrote, although each person has all of these needs to some
extent, only one of them tends to
motivate an individual at any given time.
Achievement motivation – a need to accomplish and
demonstrate competence or mastery. It
pertains to a person’s need for significant success, mastering of
skills, control or high standards.
It is associated with a range of actions. Individual seek
achievement, attainment of challenging
(and also realistic) goals, and advancement in the school or job.
This need is influenced by internal drivers for action (intrinsic
motivation), and the pressure used
by the prospects of others (extrinsic motivation). Low need for
achievement could mean that
individuals want to minimise risk of failure, and for this reason
people may choose very easy or
too difficult tasks, when they cannot avoid failure. In contrast,
high need for achievement means
that humans try to choose optimal, sufficiently difficult tasks,

because they want to get the
chance to reach their goals, but they have to work for it, they
need to develop themselves.
Individuals with high need for achievement like to receive
regular feedback on their progress and
achievements; and often like to work alone; seek challenges and
like high degree of
independence.
Sources of high need for achievement can be: praise for success,
goal setting skills, one’s own
competence and effort to achieve something, and it does not
depend only on luck; of course
positive feelings and also independence in childhood.
McClelland said that training, teaching can
increase an individual’s need for achievement. For this reason,
some have argued that need for
achievement is not a need but a value.
Affiliation motivation – a need for love, belonging and
relatedness
These people have a strong need for friendships and want to
belong within a social group, need
to be liked and held in popular regard. They are team players,
and they may be less effective in
leadership positions. High-need-for-affiliation persons have
support from those with whom they
have regular contact and mostly are involved in warm
interpersonal relationships. After or during
stressful situation individuals need much more affiliation. In
these situations people come
together and find security in one another. There are times when
individuals want to be with

others and at other times to be alone – affiliation motivation can
become increased or decreased.
Individuals do not like high risk or uncertainty.
Authority/power motivation – a need to control over one’s own
work or the work of others.
These persons are authority motivated. There is a strong need to
lead and to succeed in their
ideas. It is also needed to increase personal status and prestige.
This person would like to control
and influence others. McClelland studied male managers with
high need for power and high need
for affiliation and found that managers with a high need for
power tended to run more productive
departments in a sales organization than did managers with a
high need for affiliation.
It is important to speak about gender differences in need for
power. It is said that men with high
need for power mostly have higher aggression, drink more, act
in sexually exploitative manner,
and participate in competitive sports, and also political unrests.
At the same time women with
higher need for power show more socially acceptable and
responsible manner, are more
concerned and caring. These types of people prefer to work in
big, multinational organisations,
businesses and other influential professions.
McClelland argues that strong need for achievement people can
become the best leaders – as we
wrote it above. But at the same time there can be a tendency to
request too much of their
employees, because they think that these people are also highly
achievement-focused and results-

driven, as they are. Think about your teachers and professors! I
am sure they all want the best for
you, they would like to develop you, but I do not think you feel
the same every time. McClelland
said that most people have and show a combination of these
characteristics.
Herzberg – Two factor theory
It is also called motivation-hygiene theory.
This theory says that there are some factors (motivating factors)
that cause job satisfaction, and
motivation and some other also separated factors (hygiene
factors) cause dissatisfaction (Figure
3). That means that these feelings are not opposite of each
other, as it has always previously been
believed.
Opposite of satisfaction is not dissatisfaction, but rather, no
satisfaction. According to Herzberg
(1987) the job satisfiers deal with the factors involved in doing
the job, whereas the job
dissatisfiers deal with the factors which define the job context.
Figure 3. Herzberg’s Two Factor Theory (Source: Author's own
figure)
If the hygiene factors, for example salary, working conditions,
work environment, safety and
security are unsuitable (low level) at the workplace, this can
make individuals unhappy,

dissatisfied with their job. Motivating factors, on the other
hand, can increase job satisfaction,
and motivation is based on an individual's need for personal
growth. If these elements are
effective, then they can motivate an individual to achieve
above-average performance and effort.
For example, having responsibility or achievement can cause
satisfaction (human characteristics)
(Dartey-Baah, 2011).
Hygiene factors are needed to ensure that an employee is not
dissatisfied. Motivation factors are
needed to ensure employee's satisfaction and to motivate an
employee to higher performance.
Table 1. Herzberg's Two Factory Theory (Source: Author's own
table)
Dissatisfaction – Low level
Hygiene factors
No dissatisfaction-High level
No satisfaction – Low level
Motivating factors Satisfaction – High level
Herzberg’s five factors of job satisfaction (motivating factors):
• achievement

• recognition
• work itself
• responsibility
• advancement
Only these factors can motivate us. But at the same time we
need the lack of dissatisfactions (we
need hygiene factors, "workpeace") to achieve more efficient
work.
Herzberg’s five factors of job dissatisfaction (hygiene factors –
deficiency needs):
• company policy and administration
• supervision
• salary
• interpersonal relationships
• working conditions
Can we motivate with money, with higher salary? What did
Herzberg and Maslow say? Is it just
the same or something different?
Herzberg addressed salary not a motivator in the way that the
primary motivators are, just like
achievement and recognition. Salary can be a motivator, if you
get always higher and higher

salary, but we cannot say that it is an incentive. Maslow said,
money or salary is needed to buy
food to eat, to have some place to live and sleep, etc. It can be a
physiological need. Some
differences between Herzberg and Maslow theory are described
in Table 2.
Table 2. Differences between Maslow’s and Herzberg’s theory
(Source: Author's own table)
Points of view Maslow’s theory Herzberg’s theory
Date of the
theory
in 1940’s in 1960’s
Study group ordinary American people well-situated American
people
About needs Every level of needs give us satisfaction
and give the opportunity to move on to
the next level of needs.
Not every type of needs can give us satisfaction,
just motivating factors.
Limitations of this theory:
• This theory oversees situational variables.
• Herzberg supposed a correlation, linear between productivity,
performance and satisfaction.

• The theory’s reliability is uncertain.
• No comprehensive measure of satisfaction was used.
• The theory ignores blue-collar workers, only white-collar
men’s opinion was discussed.
However, Herzberg tried to bring more humanity and caring into
companies’ life. His intention
was not to develop a theory that is used as a 'motivational tool’,
but to provide a guidance to
improve organisational performance.
Table 3. Summary of Content Theories of Motivation (Source:
Author's own table)
Maslow Alderfer McClelland Herzberg
Physiological Existence
Hygiene
Safety and security
Belongingness and love Relatedness Need for Affiliation
Self-esteem Growth Need for power Motivators
Self-actualization Need for achievement
There are some critics for all need theories. Although, there is a
consensus for the general

concept: human behaviour is motivated by the strong wish for
fulfilling a human need. Critics
are:
• Universality: they do not care about gender, age, culture,
religious or other factor differences.
• Research support and methodology problems: these theories
were not based on reliable and
creditable research results.
• Work focus: individuals have needs only at their workplaces,
but not at any other places of their
life.
• Individual differences and stability over time.
• Process simplicity.
Skinner's reinforcement theory
The Reinforcement theory, based on Skinner's operant
conditioning theory, says that behaviour
can be formed by its consequences (Gordon, 1987).
Positive reinforcements, for example praise, appreciation, a
good mark/grade, trophy, money,
promotion or any other reward can increase the possibility of
the rewarded behaviours'
repetition.
If a student gets positive verbal feedback and a good grade for
his test, this reinforcement
encourages the performance of the behaviour to recur. If the
teacher doesn’t tell precisely what
he expects, then the positive reinforcements can drive the

behaviour closer to the preferred. For
example, when a student who is usually late to class gets
positive feedback when he arrives on
time, the student becomes more and more punctual. Positive
reinforcement motivates to get the
anticipated reinforcement of required behaviour.
We use negative reinforcement when we give a meal to a hungry
person if he behaves in a
certain manner/way.
In this case the meal is a negative reinforcement because it
eliminates the unpleasant state
(hunger).
Contrary to positive and negative reinforcement, punishment
can be undesired reinforcement, or
reinforce undesired behaviour.
For example, if a student is always late to class and thus he gets
negative verbal feedback and
also always has to tidy up the classroom at the end of the day,
in this case the undesirable
behaviour is reinforced with an undesirable reinforcer. The
punishment declines the tendency to
be late.
According to the theory, positive reinforcement is a much better
motivational technique than
punishment because punishment:
• tries to stop undesirable behaviour and does not offer an
alternative behaviour

• creates bad feelings, negative attitudes toward the activity,
and the person who gives the
punishment
• suppresses behaviour, but does not permanently eliminate it.
Once certain behaviour has been conditioned through repetitive
reinforcement, elimination of the
reinforcement will decline the motivation to perform that
behaviour. Therefore it is better not to
give a reward every time. Reinforcement in the workplace
usually takes place on a partial or
irregular reinforcement schedule, when reward is not given for
every response.
The reinforcement theory is included in many other motivation
theories. Reward must meet
someone's needs, expectations, must be applied equitably, and
must be consistent. The desired
behaviour must be clear and realistic, but the issue remains:
which reinforcements are suitable
and for which person?
Vroom's expectancy theory
The expectancy theory places an emphasis on the process and on
the content of motivation as
well, and it integrates needs, equity and reinforcement theories.
Victor Vroom's (1964) expectancy theory aims to explain how
people choose from the available
actions. Vroom defines motivation as a process that governs our
choices among alternative forms
of voluntary behaviour. The basic rationale of this theory is that
motivation stems from the belief
that decisions will have their desired outcomes.

The motivation to engage in an activity is determined by
appraising three factors. These three
factors are the following (Figure 4):
• Expectancy – a person’s belief that more effort will result in
success. If you work harder, it
will result in better performance.
In this case the question is: "Am I capable of making a good
grade on a math test if I learn
more?" Appraisal of this factor is based on the effort to learn
math, on knowledge of math, on
the previous experience of math test results, on self-efficacy
and specific self-rated abilities.
• Instrumentality – the person’s belief that there is a connection
between activity and goal. If
you perform well, you will get reward.
In this case the question is that: "Will I get the promised reward
(a good mark) for performing
well on a math test?" Appraisal of this factor is based on the
accuracy and consistency of
marking. If one day I get a good grade and another day I get a
bad grade for the same
performance, then the motivation will decrease.
• Valence – the degree to which a person values the reward, the
results of success.
In this case the question is that: "Do I value the reward that I
get?" Appraisal of this factor is
based on the importance of its subject (math), the good mark,

and the good performance in
general.
Vroom supposes that expectancy, instrumentality and valence
are multiplied together to
determine motivation. This means that if any of these is zero,
then the motivation to do
something will be zero as well.
Figure 4. Vroom's expectancy theory (Source: Author's own
figure)
A person who doesn’t see the connection between effort and
performance will have zero
expectancy. A person who can’t perceive the link between
performance and reward will have
zero instrumentality. For a person who doesn’t value the
anticipated outcome, reward will have
zero valence.
For example if I think:
- that no matter how hard I’m studying I can’t learn math due to
lack of necessary skills or
- that no matter how good I perform on the test I don’t always
get good mark so the reward is
unpredictable, not dependent on my success or
- the good mark from math is not important for me, and I’m not
interested in math, so the reward
is not attractive, then I won’t be motivated to learn for the

exam.
The expectancy theory highlights individual differences in
motivation and contains three useful
factors for understanding and increasing motivation. This theory
implies equity and importance
of consistent rewards as well (Konig & Steel 2006).
Adams' equity theory
The equity theory states that people are motivated if they are
treated equitably, and receive what
they consider fair for their effort and costs.
The theory was suggested by Adams (1965) and is based on
Social Exchange theory.
According to this theory, people compare their contribution to
work, costs of their actions and
the benefits that will result to the contribution and benefits of
the reference person. If people
perceive that the ratio of their inputs-outputs to the ratio of
referent other's input-output is
inequitable, then they will be motivated to reduce the inequity
(Figure 5).
Figure 5. Adams' equity theory (Source: Author's own figure)
At the workplace the workers put inputs into the job, such as

education, experience, effort,
energy, and expect to get some outcomes such as salary, reward,
promotion, verbal recognition,
and interesting and challenging work each in equal amounts
(Figure 6).
Figure 6. Examples for the inputs and outcomes in the equity
theory (Source: Author's own
figure)
The equity theory works not just in the workplace, but at school
as well. For example, when for
the same oral exam performance two students get different
marks, then inequity exists. In this
case, the student who gets the worse mark may lose his/her
motivation to learn (reduce his/her
efforts), or persuade the teacher to give him/her a better mark,
or change the perception of the
reference person's performance ("I did not know everything, but
my classmate could answer all
the questions"). At the school it can demotivate students if
someone who never studies or who
never performs better than the others always gets good mark.
The greater the inequity the greater
the distress an individual feels, which will motivate the
endeavour to make the outcomes and the
inputs equal compared to the reference person.
When inequity exists, a person might…
• reduce his/her inputs, efforts, quantity or quality of his/her
work

• try to increase his/her outputs (ask for better mark, or pay
raising)
• adjust his/her perception of reference person or his/her
outcomes or inputs (re-evaluate his/her
or the reference person's effort or outcome)
• change the reference person
• quit the situation.
The problem with equity theory is that it does not take into
account differences in individual
needs, values, and personalities. For example, one person may
perceive a certain situation as
inequitable while another does not. Nevertheless ensuring
equity is essential to motivation.
Locke's goal-setting theory
Locke's (1990) goal setting theory is an integrative model of
motivation just like the expectancy
theory.
It emphasizes that setting specific, challenging performance
goals and the commitment to these
goals are key determinants of motivation. Goals describe a
desired future, and these established
goals can drive the behaviour. Achieving the goals, the goal
accomplishment further motivates
individuals to perform.
We can distinguish goals according to specificity, difficulty and
acceptance. A specific goal can

be measured and lead to higher performance than a very general
goal like “Try to do your best!”
A difficult, but realistic goal can be more motivational than
easy or extremely difficult ones. The
acceptance of the goal is very important as well, therefore
involvement in the goal setting is
recommended.
For example, if I decide to pass a medium level language exam
in German in six months – this
goal is specific and difficult enough – because I want to work in
Germany – this goal is very
important for me, therefore the goal commitment is high – then
I will be motivated to learn, and
to pass the exam.
The following guidelines have been useful in the goal-setting
(Figure 7):
• Set challenging but attainable goals. Too easy or too
difficult/unrealistic goals don’t motivate
us.
• Set specific and measurable goals. These can focus toward
what you want, and can measure the
progress toward the goal.
• Goal commitment should be obtained. If people don’t commit
to the goals, then they will not
put effort toward reaching the goals, even specific, or
challenging ones. Strategies to achieve this
could include participation in the goal setting process, use of
extrinsic rewards (bonuses), and
encouraging intrinsic motivation through providing workers
with feedback about goal
attainment. Pressure to achieve goals is not useful because it

can result in dishonesty and
superficial performance.
• Support elements should be provided. For example,
encouragement, needed materials,
resources, and moral support.
• Knowledge of results is essential – so goals need to be
quantifiable and there needs to be
feedback.
Goal-setting is a useful theory which can be applied in several
fields, from sport to a wide range
of work settings. Sports psychology in particular has adopted its
recommendations. The concept
of goal-setting has been incorporated into a number of incentive
programmes and management
by objectives (MBO) techniques in a number of work areas.
Feedback accompanying goal
attainment may also enhance a worker’s job performance and
ability to become more innovative
and creative on the job through a trial-and-error learning
process. Since goal-setting is a
relatively simple motivational strategy, it has become
increasingly popular.
Figure 7. Process of motivation according to goal-setting theory
(Source: Author's own figure)

14.3 Need-Based Theories of Motivation
Learning Objectives
1. Explain how employees are motivated according to Maslow’s
hierarchy of needs.
2. Explain how ERG theory addresses the limitations of
Maslow’s hierarchy.
3. Describe the difference between factors contributing to
employee motivation and how
these differ from factors contributing to dissatisfaction.
4. Describe the needs for achievement, power, and affiliation,
and how these needs affect
work behavior.
The earliest answer to motivation involved understanding
individual needs. Specifically, early
researchers thought that employees try hard and demonstrate
goal-driven behavior to satisfy
needs. For example, an employee who is always walking around
the office talking to people may
have a need for companionship and his behavior may be a way
of satisfying this need. There are
four major theories in the need-based category: Maslow’s
hierarchy of needs, ERG theory,
Herzberg’s dual factor theory, and McClelland’s acquired needs
theory.
Maslow’s Hierarchy of Needs
Abraham Maslow is among the most prominent psychologists of
the 20th century and the
hierarchy of needs, accompanied by the pyramid representing
how human needs are ranked, is an

image familiar to most business students and managers.
Maslow’s theory is based on a simple
premise: Human beings have needs that are hierarchically
ranked (Maslow, 1943; Maslow,
1954). There are some needs that are basic to all human beings,
and in their absence, nothing else
matters. As we satisfy these basic needs, we start looking to
satisfy higher-order needs. Once a
lower-level need is satisfied, it no longer serves as a motivator.
The most basic of Maslow’s needs are physiological needs.
Physiological needs refer to the need
for air, food, and water. Imagine being very hungry. At that
point, all your behavior may be
directed at finding food. Once you eat, though, the search for
food ceases and the promise of
food no longer serves as a motivator. Once physiological needs
are satisfied, people tend to
become concerned about safety. Are they safe from danger,
pain, or an uncertain future? One
level up, social needs refer to the need to bond with other
human beings, to be loved, and to form
lasting attachments. In fact, having no attachments can
negatively affect health and well-being
(Baumeister & Leary, 1995). The satisfaction of social needs
makes esteem needs more salient.
Esteem needs refer to the desire to be respected by one’s peers,
feeling important, and being
appreciated. Finally, at the highest level of the hierarchy, the
need for self-actualization refers to
“becoming all you are capable of becoming.” This need
manifests itself by acquiring new skills,
taking on new challenges, and behaving in a way that will lead
to the satisfaction of one’s life
goals.

Figure 14.5 Maslow’s Hierarchy of Needs
Source: Adapted from Maslow, A. H. (1954). Motivation and
personality. New York: Harper.
Maslow’s hierarchy is a systematic way of thinking about the
different needs employees may
have at any given point and explains different reactions they
may have to similar treatment. An
employee who is trying to satisfy her esteem needs may feel
gratified when her supervisor
praises her. However, another employee who is trying to satisfy
his social needs may resent
being praised by upper management in front of peers if the
praise sets him apart from the rest of
the group.
So, how can organizations satisfy their employees’ various
needs? By leveraging the various
facets of the planning-organizing-leading-controlling (P-O-L-C)
functions. In the long run,
physiological needs may be satisfied by the person’s paycheck,
but it is important to remember
that pay may satisfy other needs such as safety and esteem as
well. Providing generous benefits,
including health insurance and company-sponsored retirement
plans, as well as offering a
measure of job security, will help satisfy safety needs. Social
needs may be satisfied by having a
friendly environment, providing a workplace conducive to
collaboration and communication
with others. Company picnics and other social get-togethers
may also be helpful if the majority

of employees are motivated primarily by social needs (but may
cause resentment if they are not
and if they have to sacrifice a Sunday afternoon for a company
picnic). Providing promotion
opportunities at work, recognizing a person’s accomplishments
verbally or through more formal
reward systems, job titles that communicate to the employee
that one has achieved high status
within the organization are among the ways of satisfying esteem
needs. Finally, self-actualization
needs may be satisfied by providing development and growth
opportunities on or off the job, as
well as by assigning interesting and challenging work. By
making the effort to satisfy the
different needs each employee may have at a given time,
organizations may ensure a more highly
motivated workforce.
ERG Theory
ERG theory of Clayton Alderfer is a modification of Maslow’s
hierarchy of needs (Alderfer,
1969). Instead of the five needs that are hierarchically
organized, Alderfer proposed that basic
human needs may be grouped under three categories, namely,
Existence, Relatedness, and
Growth (see the following figure). Existence need corresponds
to Maslow’s physiological and
safety needs, relatedness corresponds to social needs, and
growth need refers to Maslow’s
esteem and self actualization.
Figure 14.7 ERG Theory

Source: Based on Alderfer, C. P. (1969). An empirical test of a
new theory of human needs. Organizational Behavior and
Human Performance, 4, 142–175.
ERG theory’s main contribution to the literature is its relaxation
of Maslow’s assumptions. For
example, ERG theory does not rank needs in any particular
order and explicitly recognizes that
more than one need may operate at a given time. Moreover, the
theory has a “frustration-
regression” hypothesis, suggesting that individuals who are
frustrated in their attempts to satisfy
one need may regress to another one. For example, someone
who is frustrated by the lack of
growth opportunities in his job and slow progress toward career
goals may regress to relatedness
needs and start spending more time socializing with one’s
coworkers. The implication of this
theory is that we need to recognize the multiple needs that may
be driving an individual at a
given point to understand his behavior and to motivate him.
Two-Factor Theory
Frederick Herzberg approached the question of motivation in a
different way. By asking
individuals what satisfies them on the job and what dissatisfies
them, Herzberg came to the
conclusion that aspects of the work environment that satisfy

employees are very different from
aspects that dissatisfy them (Herzberg, et. al., 1959; Herzberg,
1965). Herzberg labeled factors
causing dissatisfaction of workers as “hygiene” factors because
these factors were part of the
context in which the job was performed, as opposed to the job
itself. Hygiene factors included
company policies, supervision, working conditions, salary,
safety, and security on the job. To
illustrate, imagine that you are working in an unpleasant work
environment. Your office is too
hot in the summer and too cold in the winter. You are being
harassed and mistreated. You would
certainly be miserable in such a work environment. However, if
these problems were solved
(your office temperature is just right and you are not harassed at
all), would you be motivated?
Most likely, you would take the situation for granted. In fact,
many factors in our work
environment are things that we miss when they are absent, but
take for granted if they are
present.
In contrast, motivators are factors that are intrinsic to the job,
such as achievement, recognition,
interesting work, increased responsibilities, advancement, and
growth opportunities. According
to Herzberg’s research, motivators are the conditions that truly
encourage employees to try
harder.
Figure 14.8 Two-Factor Theory of Motivation
Source: Based on Herzberg, F., Mausner, B., & Snyderman, B.
(1959). The motivation to work. New York: Wiley;

Herzberg, F. (1965). The motivation to work among Finnish
supervisors. Personnel Psychology, 18, 393–402.
Herzberg’s research, which is summarized in the figure above,
has received its share of criticism
(Cummings & Elsalmi, 1968; House & Wigdor, 1967). One
criticism relates to the classification
of the factors as hygiene or motivator. For example, pay is
viewed as a hygiene factor. However,
pay is not necessarily a contextual factor and may have
symbolic value by showing employees
that they are being recognized for their contributions as well as
communicating to them that they
are advancing within the company. Similarly, quality of
supervision or relationships employees
form with their supervisors may determine whether they are
assigned interesting work, whether
they are recognized for their potential, and whether they take on
more responsibilities. Despite its
limitations, the two-factor theory can be a valuable aid to
managers because it points out that
improving the environment in which the job is performed goes
only so far in motivating
employees.
Figure 14.9
Plaques and other recognition awards may motivate employees
if these awards fit with the company culture and if they
reflect a sincere appreciation of employee accomplishments.
phjakroon – Pixabay – CC0 public domain.

Acquired Needs Theory
Among the need-based approaches to motivation, Douglas
McClelland’s acquired needs theory
is the one that has received the greatest amount of support.
According to this theory, individuals
acquire three types of needs as a result of their life experiences.
These needs are need for
achievement, need for affiliation, and need for power. All
individuals possess a combination of
these needs.
Those who have high need for achievement have a strong need
to be successful. A worker who
derives great satisfaction from meeting deadlines, coming up
with brilliant ideas, and planning
his or her next career move may be high in need for
achievement. Individuals high on need for
achievement are well suited to positions such as sales where
there are explicit goals, feedback is
immediately available, and their effort often leads to success
(Harrell & Stahl, 1981; Trevis &
Certo, 2005; Turban & Keon, 1993). Because of their success in
lower-level jobs, those in high
need for achievement are often promoted to higher-level
positions (McClelland & Boyatzis,
1982). However, a high need for achievement has important
disadvantages in management.
Management involves getting work done by motivating others.
When a salesperson is promoted
to be a sales manager, the job description changes from actively
selling to recruiting, motivating,
and training salespeople. Those who are high in need for

achievement may view managerial
activities such as coaching, communicating, and meeting with
subordinates as a waste of time.
Moreover, they enjoy doing things themselves and may find it
difficult to delegate authority.
They may become overbearing or micromanaging bosses,
expecting everyone to be as dedicated
to work as they are, and expecting subordinates to do things
exactly the way they are used to
doing (McClelland & Burnham, 1976).
Individuals who have a high need for affiliation want to be liked
and accepted by others. When
given a choice, they prefer to interact with others and be with
friends (Wong &
Csikszentmihalyi, 1991). Their emphasis on harmonious
interpersonal relationships may be an
advantage in jobs and occupations requiring frequent
interpersonal interaction, such as social
worker or teacher. In managerial positions, a high need for
affiliation may again serve as a
disadvantage because these individuals tend to be overly
concerned about how they are
perceived by others. Thus, they may find it difficult to perform
some aspects of a manager’s job
such as giving employees critical feedback or disciplining poor
performers.
Finally, those with high need for power want to influence others
and control their environment.
Need for power may be destructive of one’s relationships if it
takes the form of seeking and
using power for one’s own good and prestige. However, when it
manifests itself in more
altruistic forms, such as changing the way things are done so
that the work environment is more

positive or negotiating more resources for one’s department, it
tends to lead to positive
outcomes. In fact, need for power is viewed as important for
effectiveness in managerial and
leadership positions (Mcclelland & Burnham, 1976; Spangler &
House, 1991; Spreier, 2006).
McClelland’s theory of acquired needs has important
implications for motivating employees.
While someone who has high need for achievement may respond
to goals, those with high need
for affiliation may be motivated to gain the approval of their
peers and supervisors, whereas
those who have high need for power may value gaining
influence over the supervisor or
acquiring a position that has decision-making authority. And,
when it comes to succeeding in
managerial positions, individuals who are aware of the
drawbacks of their need orientation can
take steps to overcome these drawbacks.
Key Takeaway
Need-based theories describe motivated behavior as individual
efforts to meet needs. According
to this perspective, the manager’s job is to identify what people
need and then to make sure that
the work environment becomes a means of satisfying these
needs. Maslow’s hierarchy
categorizes human needs into physiological, safety, social,
esteem, and self-actualization needs.
ERG theory is a modification of Maslow’s hierarchy, where the
five needs are collapsed into

three categories (existence, relatedness, and growth). The two-
factor theory differentiates
between factors that make people dissatisfied on the job
(hygiene factors) and factors that truly
motivate employees. Finally, acquired-needs theory argues that
individuals possess stable and
dominant motives to achieve, acquire power, or affiliate with
others. Each of these theories
explains characteristics of a work environment that motivate
employees.
Exercises
1. Many managers assume that if an employee is not performing
well, the reason must be
lack of motivation. What is the problem with this assumption?
2. Review Maslow’s hierarchy of needs. Do you agree with the
particular ranking of
employee needs?
3. Review the hygiene and motivators in the two-factor theory.
Are there any hygiene
factors that you would consider to be motivators and vice versa?
4. A friend of yours is competitive, requires frequent and
immediate feedback, and enjoys
accomplishing things. She has recently been promoted to a
managerial position and seeks
your advice. What would you tell her?
5. Which motivation theory have you found to be most useful in
explaining why people
behave in a certain way? Why?
References

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Herzberg, F. (1965). The motivation to work among Finnish
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Herzberg, F., Mausner, B., & Snyderman, B. (1959). The
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Need-Based Theories of Motivation in a
Workplace
by Maureen Malone
Managers and supervisors always want to get the best
performance from their employees.
Productive and efficient employees help increase the company's
profits and growth. Several
theories by people such as Abraham Maslow, Frederick
Herzberg, David McClelland, and
Clayton Alderfer state that employee satisfaction and
performance is based on how well the
company meets the needs of the employee.
Hierarchy of Needs
Abraham Maslow's hierarchy of needs theorizes that an
employees most basic needs must be met
before he will be motivated by higher needs. The hierarchy
starts with physiological needs such
as food and water, safety needs, social needs, esteem needs and
finally self-actualization needs.
Companies can meet physiological needs by providing break
times for meals and snacks and
adequate salary for the employee to house and feed her family.
Employers must provide a safe
work environment with minimal job hazards and free from
threats from other employees or
clients. Social needs may be met by encouraging a team
environment with encouragement and
respect among coworkers. Esteem needs include recognition and
reward for good performance.
And companies can fulfill self-actualization needs by giving
assignments that challenge

employees and allow them to be creative in their work.
Motivation Hygiene Theory
Frederick Herzberg's motivation hygiene theory is based on two
types of needs: hygiene needs
and human needs. Hygiene needs are needs that the employee
needs to have met but that don't
necessarily improve performance. However, if these needs are
not met, employee performance
declines. Examples of hygiene needs include safe working
conditions and a fair salary. Human
needs are more useful as motivating factors for employees and
include things such as
promotions, recognition, awards and responsibility.
Acquired Needs Theory
David McClelland's acquired needs theory is based on three
needs: achievement, power and
affiliation. People learn or acquire these needs throughout their
lives. Companies meet
achievement needs by providing employees with challenging
assignments, competitions and
rewards for excellent work. Power needs may be met by
offering opportunities for advancement
and increased responsibility. And employers can meet
affiliation needs by creating a team
environment that is safe and respectful for all employees.
ERG Theory
Clayton Alderfer based his ERG theory on three needs:
existence, relatedness, and growth.

5 Demand and Consumer ChoiceCharles O. Cecilage fotostock

5 Demand and Consumer ChoiceCharles O. Cecilage fotostock

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