Consumer Behavior

1
Consumer Behavior Utility Maximization

• Chapter 8

2
Income Substitution Effects

• Income Effect- Impact of a product price change
  on a consumers real income and on quantity
  demanded.
• Substitution Effect- Impact of a product price
  change and your willingness to buy that product
  as opposed to a substitute item.

3
Utility

• Satisfaction or pleasure one gets from consuming
  a product.
• Utility for a product varies from person to
  person
• Difficult to measure

4
Total Utility Marginal Utility

• Total Utility- Total amount of satisfaction a
  person derives from consuming some specific
  quantity (I.e. 10 units)
• Marginal Utility- The extra satisfaction a
  consumer realizes from an additional unit of that
  product. (I.e. going from the 10th unit to the
  11th the difference between the two).

5
Key Graph
Tacos Consumed Total Utility Marginal Utility
0 0 ---
1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2
6
Law of Diminishing Marginal Utility

• Consumers fulfill specific wants with succeeding
  units of a commodity
• Each added unit provides less utility
  (satisfaction) than the last unit purchased.

7
Theory of Consumer Behavior

• The typical consumers situation has the following
  dimensions
• Rational behavior
• Get most out of their
• Preferences
• Clear-cut preferences for goods/services
• Budget constraint
• Fixed amount to spend
• Prices
• Every good carries a price tag

8
Utility-Maximizing Rule

• To maximize satisfaction, the consumer should
  allocate his or her income so that the last
  dollar spent on each product yields the same
  amount of marginal utility.
• Marginal Utility per Dollar- Before applying the
  utility maximizing rule to these data, we must
  put the MU information on a per-dollar-spent basis

9
Utility-Maximizing Table (Income 10 to spend)
Units Marginal Utility (Product A) Price 1 MU Per Dollar (MU/Price) Marginal Utility (Product B) Price 2 MU Per Dollar (MU/Price)
1 10 24
2 8 20
3 7 18
4 6 16
5 5 12
6 4 6
7 3 4
10
Budget Line

• Schedule or curve that shows various combinations
  of two products a consumer can buy with a
  specific money income.
• Characteristics
• Income changes
• Increase in money income shifts the budget line
  to the right decrease to the left.
• Price changes
• Decline in prices of both products shifts the
  curve to the right. Increase in prices of both
  shifts the curve to the left.

11
Budget Schedule
Units of A Price 1.50 Units of B Price 1 Total Expense (Price Units) Add A B Together
8 0 12 (120)
6 3 12 (93)
4 6 12 (66)
2 9 12 (39)
0 12 12 (012)
12
Indifference Curves

• Shows all combinations of two products that will
  yield the same utility to the consumer

13
Indifference Schedule
Combination Units of A Units of B
J 12 2
K 6 4
L 4 6
M 3 8
14
Indifference Map

• Series of indifference curves
• Each curve reflects a different level of total
  utility

15
Consumers Equilibrium Position

• Budget Line Combinations of products a customer
  can afford
• Of these combinations, the consumer would prefer
  the combination that provides the greatest
  utility
• The equilibrium position is the point that is on
  the budget line but on the furthest indifference
  curve