The theories of consumer behavior (KINH tế VI mô SLIDE)

Utility Theory• Utility is the satisfaction or pleasure that a consumer gets from consuming a given bundle of goods or service market basket... a numerical indicator of a person’s sat

The Theories of

Consumer Behavior

4

MICROECONOMICS

Overview

Theories of consumer behavior

Explanation of how consumers allocate

income to purchase different goods and

services (market basket)

Utility Theory

Theory of Consumer Choice

Three steps:

1 Consumer Preference

2 Budget Constraint

3 Given preferences and limited incomes, what amount and type of goods will be purchased?

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1 Utility Theory

• Utility is the satisfaction or pleasure that a

consumer gets from consuming a given bundle

of goods or service (market basket)

E.g Utility for coffee

Number of

cups Utility

a numerical indicator of a person’s satisfaction

If one item is preferred to some alternative, the

utility from the item is greater than the alternative

Actual unit of measurement for utility is not

important (ordinal, not cardinal, ranking is sufficient)

– Consumers try to obtain the largest possible total

satisfaction (utility) from the market basket that they buy with their incomes.

Utility Function

• Formula that assigns level of utility to individual market baskets

– Baskets of X and Y

U = f (X; Y)

E.g.: Baskets (X-Coffee; Y-Sweets)

U = X.Y

or

U = X 1/2 Y 1/2

• Consumer’s purpose: maximizing total utility 

Umax

Marginal Utility (MU)

• MU measures additional satisfaction

obtained from consuming 1 additional unit of goods or service.

– How much happier is individual from consuming one more unit of coffee

• The change in total utility due to a one-unit change in the quantity of a good or service

U MU

Q







Marginal utility -MU

Number

of cups Utility MU

Observation: Marginal Utility is diminishing as consumption increase

Marginal utility

 Principle of Diminishing marginal utility: As more good is consumed, additional utility

consumer gains will be smaller and smaller

 Note: total utility will continue to increase since consumer makes choices that make

them happier

Application 1

• Diminishing marginal utility and demand curve

• To a consumer, the larger marginal utility, the higher willingness to pay

• The smaller MU, the lower willingness to pay

 The diminishing marginal utility explains the slope downward demand curve

Willingness to Pay:

 The maximum price that a buyer is willing and able to pay for a good.

 Measures how much the buyer values the good or service.

Application 2

• Diminishing marginal utility and Consumer

surplus

– Consumer Surplus: the maximum amount a

consumer will be willing to pay for a good

depends upon the expected utility (benefits ) of

that good

– CS = MUx – Px

– A lower market price will increase consumer

surplus

– A higher market price will reduce consumer

surplus

Consumer Surplus: Mathematically

 Maximum Price = $11

 Market Price = $6

 Quantity Purchased = 6

 Assume: Price drops $1 for every additional unit sold.

 Consumer Surplus = $15

$51 - $36 = $15 ($11+$10+$9+$8+$7+$6) - ($6 x 6) = $15

$11

6

$10 $9 $8 $7 $6

5 4

3 2

1

Market

Price

Quantity Purchased

$11

6

$10

$9

$8

$7

$6

5 4

3 2

1

Total Consumer

Benefits

P

Q

$11

6

$10

$9

$8

$7

$6

5 4

3 2

1

Consumer’s Expense

P

Q

$11

6

$10

$9

$8

$7

$6

5 4

3 2

1

Consumer Benefit -Consumer Expense

CONSUMER SURPLUS!

$51 - $36 =

$15

P

Q

Consumer Surplus: Graphical

S

D

Consumer Surplus