This document provides an overview of economic theory related to consumer behavior and choice. It discusses the concepts of utility, total utility, marginal utility, and the law of diminishing marginal utility. Consumer demand curves reflect how marginal utility declines as consumption increases. Consumer surplus is defined as the difference between what consumers are willing and able to pay versus the market price. Indifference curves represent bundles of goods that provide equal utility or satisfaction to consumers. The budget line shows the combinations of goods that can be purchased given prices and an income level. Consumers maximize their utility by choosing the bundle on their highest attainable indifference curve that is also on their budget line.

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CHAPTER IV:
THEORY OF CUSTOMERS’
BEHAVIOURS
When consumers go to grocery stores to buy their chickens for Lunar New Year
dinner, they may be disappointed that the price of chicken is as high as it is.
At the same time, when farmers bring to market the chickens they have raised,
they wish the price of turkey were even higher.
These views are not surprising:
-Buyers always want to pay less,
-Sellers always want to get paid more. But is there a “right price” for chicken
from the standpoint of society as a whole?
I.Theory of Utility
1. Definitions
 Utility (U):
◦ Definition: utility is a measure of happiness or
satisfaction
◦ Characteristics:
 Personalized
 Vague
 Positive relationship with the price which consumer
is willing to pay
 Total utility (TU)
◦ Definition: the satisfaction consumer gains
while he consume total of a particular goods
or services
 Marginal utility (MU)
◦ Definition: the change in total utility brought
by an additional unit of goods consumed

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2.The law of Diminishing Marginal Utility
As a person increases consumption of a
product - while keeping consumption of
other products constant - there is a
decline in the marginal utility that
person derives from consuming each
additional unit of that product
3. The relationship between the law of
diminishing marginal utility and the demand
curve
 The demand curve for a good reflects
consumers’ willingness to pay for it.
 When the price of a good rises, consumers
are willing to pay for fewer units, so the
quantity demanded falls.
 We now look more deeply at the decisions
that lie behind the demand curve.

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-4
-2
0
2
4
6
8
10
1 2 3 4 5 6
MU Curve
4. Consumption Surplus (CS)
- Definition:
Consumer surplus is the difference
between the total amount that
consumers are willing and able to pay
for a good or service (indicated by the
demand curve) and the total amount that
they actually do pay (i.e. the market
price for the product).
Note: The level of consumer surplus at
equilibrium point is shown by the area under
the demand curve and above the ruling
market price as illustrated in the diagram
below:

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II.The theory of consumer’s choice
When you walk into a store, you are
confronted with thousands of goods that you
might buy.
Of course, because your financial resources
are limited, you cannot buy everything that
you want.
You, therefore, consider the prices of the
various goods being offered for sale and buy a
bundle of goods that, given your resources,
best suits your needs and desires
1. Consumer’s preference
a. Assumptions:
- Consumer can arrange, compare bundles
of goods
- Consumer prefers more to less
- The comparison can be transferred
A>B
B>C
 A>C
b. Indifference Curve (IC or U)
b. 1 Definition:
A curve that shows consumption bundles that
give the consumer the same level of
satisfaction

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b.2 Five properties of indifferent curves:
- IC has downward slope
- ICs cannot intersect
-Their slope gets steadily flatter to the right

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Moving between 2 points on IC will result
in: ∆U=0
 MUx∆X + MUy∆Y = 0
- Higher indifference curves are preferred to
lower ones
◦ Consumers usually prefer more of something
to less of it
◦ Higher indifference curves represent larger
quantities of goods than lower indifference
curves. Thus, the consumer prefers being on
higher indifference curves

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- Different kinds of IC represent different
preference
b.3 Special cases of IC
PERFECT SUBSTITUTES AND PERFECT
COMPLEMENTS.
- When two goods are easily substitutable,
such as Coca and Pessi, the indifference
curves are straight lines
- When two goods are strongly
complementary, such as left shoes and
right shoes, the indifference curves are
right angles

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2.The budget line
• Income and prices together
determine the combinations of
the goods that the consumer
can afford.
• The budget line separates the
affordable from the
unaffordable.
Consider a student with a
budget of 250,000VND to spend on
meals and films.
0
1
2
3
4
5
6
0 2 4 6 8 10 12
Meals
Films
A
B
C
D
E
F
G
Price of meals is 25,000 VND;
price of films is 50,000VND.
 Budget Line:
- Changes caused by income

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- Changes caused by price’s change
oChange in Px
oPx↑:BL turn in
oPx↓:BL turn out
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III.The consumer’s choice
• The choice point is at C
• where the budget line is at
a tangent to an IC
• Points B and E are also
affordable but give lower
utility,being on a lower IC.
U3
Quantity of meals
U2
U2U1
U3
U1
BL
C
E
B
The point at which utility is maximised is found by bringing
together the indifference curves (U) and the budget line (BL)