1

MODULE 4: CONSUMER BEHAVIOR AND UTILITY MAXIMIZATION

I. Learning Objectives

By the end of this module, the student should be able to:

1. Define and understand the Maslow’s Hierarchy of Needs.
2. Explain the theory of Utility and identify the levels of utility.
3. Explain and understand the behavior of consumers in the society.

II. Introduction

The purpose of studying consumer behavior is to know the basic needs and wants of
people in the society in order to satisfy them and to gain more profit on the side of the producers
or firm. This topic, identifies the needs and wants of consumer and their level of satisfaction.

III. Lesson

CLO 1. Define and understand the Maslow’s Hierarchy of Needs.

Consumer
 The one who demands and consume goods and services.
 Is the king capitalist of free-market economy.
 Consumer power determines what needed to be produced since we are the ultimate
purchasers of goods and services

Producers – the one who satisfy the needs and wants of consumers
Goods – refers to anything that provides satisfaction to the needs, wants and desire of the
consumer. It can be final goods or intermediate goods (tangible)
Example: cars, books, clothes, cellphone and etc.
Services – (intangible) it is an economic activity or a transaction in which no physical goods are
transferred from the seller to the buyer.
Example: Hairdressing, Banking, telecommunication, insurance and etc.
Consumer goods – goods that yield satisfactions directly to any consumer, primary sold for
consumption, not used for further processing and easily accessible to consumers.
Example: Soft drink, bread, crackers, and etc.

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

2

Essential or necessity goods – are goods that satisfy the basic needs of man
Example: shelter, food and clothes
Luxury goods – are products that are not essential but are highly desired and associated with
wealthy or affluent people.
Example: perfumes, jewelry, luxury cars and etc.

Taste and preferences

– determined by age, income, education, gender, occupation, customs and tradition
– Preferences are the choices made by the consumers to which products or services to
consume.
Example:
1. Some prefer bread than rice or other prefer fish and vegetables than meat.
2. Some individual prefer simple taste other prefer sophisticated and extravagant

Maslow’s Hierarchy of Needs - is a motivational theory in psychology comprising a five-tier

model of human needs, often depicted as hierarchical levels within a pyramid. ... From the
bottom of the hierarchy upwards, the needs are: physiological, safety, love and belonging,
esteem, and self-actualization.

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

3

The basic human needs placed by Maslow in an ascending order of importance:

Physiological needs – basic needs sustaining human life
Safety needs – free of physical danger and fear losing one’s belongings (property, work)
Social needs – needs that covers the value of having a sense of belongingness (love, care)
Esteem needs – explains the importance of self-esteem, recognition, status of an individual and
the general acceptance of the society to an individual (power, prestige, status & self-
confidence)
Self-actualization – needs that explain the worth of a person, self-development, growth,
realization and achievement

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

4

CLO2. Explain the theory of Utility and identify the levels of utility.

Utility
 refers to the satisfaction or pleasure that an individual or consumer gets from the
consumption of a good or service they purchase.
 Is also measured by how much a consumer is willing to pay for a good/service.
Example:
Suppose you have an extra amount of money to buy additional unit of siopao but the
willingness to buy additional unit of siopao declines. What is the reason for this? As you might
experience the more siopao you eat, the more you become satiated so that you are not willing
to spend more for the next siopao than you wish to consume. The satisfaction or utility that
you derive in the consumption of an additional siopao declines as you consume more and more
of it.
It simply explain how our satisfaction or utility as consumers decline when they try to
consume more and more of the same good at a particular point in time.

Table 1
Hypothetical Demand Schedule for Siopao
Price (P) Quantity Demanded (Q)
15 1
12.75 2
10.50 3
8.25 4

 The tables shows that as you continue to buy siopao your willingness to pay for it
continuously declines because your satisfaction from the good declines as you
consume more of it.
Two concept of Utility theory
1. Marginal Utility
 defined as additional satisfaction that an individual derives from consuming an extra
unit of a goods or service
 Marginal means” Extra or Additional “

2. Total Utility
 total satisfaction that a consumer derives from the consumption of a given quantity of a
good or service

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

5

 Depends on the quantity of good consumed, more consumption generally gives more
total utility
 Increases by consuming more and more of goods or service.
Example:
Assume that at the end of our class, you are too hungry, you went to the cafeteria and
you bought siopao for merienda. In this case your total utilities are 40 utils. Assume further
that you consumed another siopao because you are too hungry. Your total utility now become
90 utils so that your marginal utility increase by 50 utils. Let assume now that you consume five
siopaos. Take note on the table 2, that your total utility for the fifth unit 350 utils but your
marginal utility has declined to only 80 utils. Why is this so? Because of the law of Diminishing
Marginal Utility.

Table 2
Hypothetical Utility Schedule For Siopao
Unit Purchased Total Utility Marginal Utility
1 40 40
2 90 50
3 170 80
4 270 100
5 350 80

 The table shows that consumption of more successive units of the same goods
increase the utility, but at a decreasing rate because marginal utility diminishes.

Diminishing Marginal Utility

 This law states that as a consumer gets more satisfaction in the long run it experience a
decline in his satisfactions for goods and services.
 This means that consumption of more successive units of the same goods increases the
total utility but at a decreasing rate because marginal utility diminishes
Mathematical derivation of marginal utility:
Marginal Utility is simply the change in total utility divided by the change in quantity, thus:

MU = TU
Q
Solve marginal Utility using the following equation:

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

6

MU = TU2 – TU1
Q2 – Q1

Where:
TU2 = the new total utility
TU1 = the original utility
Q2 = the new quantity consumed
Q1 = the original quantity consumed

Applying the formula, we can derive the marginal utility for the total utility presented in table 2.
Thus, if we want to know and determine the marginal utility from the consumption of two pieces of
siopao to three pieces, we can simply apply the formula presented above.

MU = 170 – 90
= 3–2
MU = 80

Maximizing Total Utility

 We have a very unique way in maximizing our utility or satisfaction, continuous
consuming more units of a certain goods until our satisfaction falls down to zero, we can
say we already reached the peak of our satisfaction when our marginal utility becomes
zero.
 At this point we already exceed our satisfaction so that we can stop consuming the
same good.

CLO3. Explain and understand the behavior of consumers in the society.

Consumer Surplus
 is a measure of the welfare we gain from the consumption of goods and services or a
measure of benefits that we derive from the exchange of goods.
 difference between the total amount that we are willing to pay for a good or service and
the total amount that we actually pay for that good and service
Example:
Suppose you are interested in buying a new pair of maong pants. So you went to the
mall to look for the pants that you wanted so much. Your budget for the pants is P3,000.

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

7

When you went to the boutique, you found out that the pants you liked the most cost only
P2,500. Immediately, you bought the pants. What is your consumer surplus?
Take note in our example that you are willing to pay for the pants at P3,000.00.
However, when you bought the pants your actual expense was only P2,500.00, therefore you
have a consumer surplus of P500.00. Because consumer surplus is simply the difference
between what you pay and what you have been willing to pay.

The Indifference curve

 Is a line that shows combinations of goods among which consumer is indifferent
 To clearly understand the concept of indifference curve, table 3 presented hypothetical
combinations of two goods (meat and fish)
Example:

Table 3
Hypothetical Table for consumption of Meat and Fish
Combination Meat (kg) Price of meat (P) Fish (kg) Price of Fish (P)
A 5 500 1 100
B 4 400 2 200
C 3 300 3 300
D 2 200 4 400
E 1 100 5 500

 Consumer A for instance can choose any combination of meat and fish, such as
combination A wherein he can consume 5 kilos of meat at P500.00 and a kilo of fish
at priced of P100.00 or he can choose combination of C where in 3 kilos of meat
priced at P300.00 and 3 kilos of fish priced at P300.00. Any of the combination of
meat and fish, consumer A will get same satisfactions, thus he will be indifferent to
any of the combination given because each combination will give him equal
satisfactions given his limited budget of P600.00.

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

8

Indifference Curve

Graph
HAMBURGER

a
4 Preferred
b
Indifference curve
2
c
Not Preferred
PIZZA
2 4 6

- The figure shows the indifference curve of consumer A where he consumes four
burgers and two pizza. However, he is indifferent to all the points on his indifference
curve. He prefers any point above the indifference curve to any point on it and does
not prefer any point on the indifference curve to any point below it.

Marginal rate of substitution (MRS)

 Rate which a person will give up a good for other combinations of goods as long as it is
above the indifference curve.
 MRS is measured by the magnitude of the slope of an indifference curve.
 When the indifference curve is steep, the MRS is high. This implies that the person is
willing to give up a large quantity of good

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

9

Budget Line
 Budget or consumption-possibility line shows the various combinations of two
products that can be purchased by the consumer with his income given the prices of
the products.
 Given a fixed budget, one must spend wisely and efficiently in order to maximize his
satisfaction

Example:

Table 4
Hypothetical table for Budget Line
Units-A (Beans in kg) Price A Units B (Onions in kg) Price B Budget
5 125 1 25 150
4 100 2 50 150
3 75 3 75 150
2 50 4 100 150
1 25 5 125 150

- The tables show the budget given by consumer A for the various combinations of his
consumption of beans and onions. Observe that if consumer A consumes more of a
good (say onions) he must give up the consumption of other goods (say beans) in order
for him to achieve the same amount of satisfaction given a limited budget.

 The purpose of a budget is not to spend more than what you have and track the
incoming and outgoing money..

IV. Learning Activities

MUST DO 1. (CLO 1)

Essay

1. Personal reflection: Based on Maslow’s hierarchy of needs, create your own personal
needs according to each of the hierarchy’s level.

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]

10

MUST DO 2. (CLO 2)

Computation:

Direction: Determine the Marginal Utility (Show your solution)

Hypothetical Utility Schedule for Chicken Sandwich

Unit Purchased Total Utility Marginal Utility
11 204
24 318
32 456
46 588
52 624
68 784
72 872
88 990
94 1046
102 2010

MUST DO 3. (CLO 3)

Situational Problem:

1. With a budget of P300.00, create a combination of two (2) goods that will suit to your
budget. You decide what combination of goods you would prefer and why? (any goods that
you prefer for combinations)
2. You have a P5,000.00 budget for shopping for your personal things and you are willing to
spend all this amount for your personal belongings. Let us assume that you spend P1,721.00
for your clothes, P668.00 for accessories, P1,115 .00 for your bags and another P1,115.00
for your shoes. Now, how much now is your consumer surplus? Discuss your answer?

MODULE in BASMIC MIRA FE A. ENEMA, MBA [Link]@[Link]