Microeconomics - theory of consumer behaviour

1. MICROECONOMICS
CHAPTER 5:
THEORY OF
CONSUMER BEHAVIOR
MUHAMMAD NAZMI BIN NAWI

2. LEARNING OBJECTIVE
 At the end of the lesson, students
should be able to:
◦ Understand consumer behavior
◦ Explain the concept of utility
◦ Calculate the marginal utility

3. 5.0 CONSUMER BEHAVIOR
 To study of a consumer while she/he
is engaged in the process of
consumption.
 This will tell us how a consumer with
his limited resources (income)
purchase various goods and services
and will compare the price and utilities
of different alternatives.

4. 5.1 CONCEPT OF UTILITY
 Utility is the satisfaction gained by consumers
from consumption of goods and services
 The ability of a good to provide satisfaction to its
consumer.
 According to the theory of utility, consumers use
satisfaction level as the basis to make
consumption choices and evaluate goods based
on satisfaction.
 Two approaches of utility theory
1) Cardinal approach
2) Ordinal approach.

5. 5.1 CONCEPT OF UTILITY
 The power of a commodity or service to satisfy
human want.
 Utility is thus the satisfaction which is derived by
the consumer by consuming the goods.
 For example, cloth has a utility for us because
we can wear it.
 Pen has a utility who can write with it.
 The utility is subjective in nature. It differs from
person to person. The utility of a bottle of wine is
zero for a person who is non drinker while it has
a very high utility for a drinker.

6. 5.2 THE UTILITY THEORY OF
DEMAND
 Utility in economics refer to the
satisfaction or benefit that a consumer
derives of his consumption.
 The utility theory explains consumer
behavior in relation to the satisfaction
that a consumer gets the moment he
consumes a good.

7. 1.Cardinal Approach
 This approach had their belief in that
the satisfaction can be measured
quantitatively or in cardinal numbers.
i.e. 1, 2, 3, 4, 5 etc.
 Ex: an apple equals to 5 utils.

8. 1.Cardinal Approach
 Utility level is normally reflected by the
willingness of a person to pay based on
the value of money.
 The higher the price willing to be paid, the
higher the level of satisfaction gain.

9. 2. Ordinal Approach
 According to this approach, utility is
not measurable. It is a mental
phenomenon.
 Each consumer keeps a number of
pairs of two commodities in his
mind equal, more or less satisfaction.
 So utility can be ranked qualitatively.
 Ex: an apple taste better than durian.

10. 2. Ordinal Approach
Example : eating durian gives more
satisfaction compared to eating
rambutan.

11. Total Utility and Marginal
Utility
 Total utility is the total satisfaction obtained
from all units of a particular commodity
consumed over a period of time.
 For example, a person consumes eggs and
gains 50 utils of total utility. This total utility is
the sum of utilities from the successive units
(30 utils from the first egg, 15 utils from the
second and 5 utils from the third egg).

12.  Marginal utility means an additional or
incremental utility. Marginal utility is the
change in the total utility that results from
unit one unit change in consumption of the
commodity within a given period of time".
 For example, when a person increases the
consumption of eggs from one egg to two
eggs, the total utility increases from 30 utils
to 45 utils. The marginal utility here would be
the15 utils of the 2nd egg consumed.

13. Quantity (Q) Total Utility (TU) Marginal Utility (MU)
1 10 10
2 22 12
3 30 8
4 36 6
5 38
2
6 38
0

14. 5.3 LAW OF DIMINISHING
MARGINAL UTILITY
 Law of diminishing marginal utility
means that the marginal utility
obtained from the consumption of
additional unit will start to decrease
after a certain level of consumption
when the amount consumed
increases.

17. THE END