Chap 21 Consumer Behavior

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Chap 21Consumer Behavior Utility Maximization

• By Anabel Gonzalez
• Amanda Reina

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A Closer Look at the Law of Demand

• Income Effect Lower the price of a product, the
  more a consumer can buy of that product
• Substitution Effect Impact that a change in a
  products price has on its relative expensiveness
  and consequently on the quantity demanded.

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Law of Diminishing Marginal Utility

• Although consumer wants in general may be
  insatiable, wants for particular commodities can
  be satisfied.
• Utility Want-satisfying power
• Not equal to Usefulness
• Vary widely from person to person
• Subjective and difficult to quantify (assume
  people can measure satisfaction with units called
  utils, units of utility)

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Total Utility and Marginal Utility

• Total Utility (TU) total amount of satisfaction
  or pleasure a person derives from consuming some
  specific quantity of a good or service.
• Marginal Utility (MU) extra satisfaction a
  consumer gets from an additional unit of that
  same product.

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Marginal Utility, Demand and Elasticity

• Consumer will rather spend additional dollars on
  products that provide more (or equal) utility,
  nor less.
• If MU of extra units drops off so rapidly demand
  is inelastic.
• If MU of extra units drops off modestly demand is
  elastic.

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Theory of Consumer Behavior

• How do consumers distribute their money incomes
  among the many goods and services available for
  purchase?
• The consumer will choose the goods and services
  that they find most satisfying/useful.

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Consumer Choice Budget Constraint

• A typical consumer
• Rational Behavior
• Preferences
• Budget constraint
• Prices

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Consumer Choice Budget Constraint

• Rational Behavior
• Consumer tries to derive the greatest amount of
  satisfaction, or utility.
• The most for their money
• Preferences
• Clear inclination for certain goods and services
  available in the market.

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Consumer Choice Budget Constraint

• Budget constraint
• Consumers have a fixed income
• Prices
• Goods are scarce in relation to the demand for
  them therefore, every good carries a price tag
• Consumer has limited number of dollars, so they
  can only buy a limited amount of goods.

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Utility-Maximizing Rule

• To maximize satisfaction, the consumer should
  distribute his/her money income so that the last
  dollar spent on each product yields the same
  amount of extra (marginal) utility.

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5
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Algebraic Restatement

• MU of product A MU product B
• Price of A Price of B

2 Utils 10 Utils
1 2

• The last dollar spent on A provides only 2 utils
  of satisfaction, while on B it provides 5 utils
  of satisfaction.
• Consumer can increase satisfaction by buying more
  of product B and less of product A.

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Utility Maximization the Demand Curve
Price per Unit of B Quantity Demanded
2 4
1 6
P()
2
Product price and quantity demanded are inversely
related!
Price per unit of B
1
4
6
Quantity demanded of B
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