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Understanding Consumer Behavior Basics

Consumer behavior refers to how individuals make decisions to spend their available resources on consumption of goods and services. There are four main factors that influence consumer purchasing decisions: income, product availability, prices, and product capacity. Consumer utility theory holds that individuals seek to maximize satisfaction from consumption. The law of diminishing marginal utility states that as consumption of a good increases, the satisfaction from additional units declines. Indifference curves and budget constraints can be used to graphically represent consumer preferences and spending limits. An increase in income shifts the budget constraint outward, allowing for increased consumption possibilities.

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Mary Tyfanie Quilantang
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167 views21 pages

Understanding Consumer Behavior Basics

Consumer behavior refers to how individuals make decisions to spend their available resources on consumption of goods and services. There are four main factors that influence consumer purchasing decisions: income, product availability, prices, and product capacity. Consumer utility theory holds that individuals seek to maximize satisfaction from consumption. The law of diminishing marginal utility states that as consumption of a good increases, the satisfaction from additional units declines. Indifference curves and budget constraints can be used to graphically represent consumer preferences and spending limits. An increase in income shifts the budget constraint outward, allowing for increased consumption possibilities.

Uploaded by

Mary Tyfanie Quilantang
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 4

CONSUMER
BEHAVIOR
Consumer Behavior
• In economics, a consumer usually
responds to their utility and that
creates the consumer theory.

• Consumer Theory argues that


individual consumption decisions
are always made because people
desire to maximize their
satisfaction from consuming
various goods and services.
There are also instances where you
buy a form of investment without
even knowing how investment
yields a better return or (ROI,
short for Return on Investment) or
profit.
Four factor that buyers are completely aware of

1. The spending on any good or 2. People are aware of the


service is exactly equal to range of products available in
individual’s savings and income. market.

3. People are aware of the 4. People are aware of the


prices of the product in market. capacity of the product.
The indifference curve depicts values
that are considered by the utility
function. A utility function shows an
individual’s value of the utility attained
from consuming each conceivable
bundle of goods. These values could be
either cardinal or ordinal values.

Cardinal is based on the number of ‘UTIL


or the unit of satisfaction.
Table 4.1 Miguel Antonio’s Utility in Drinking Caramel Macchiato
No. of Caramel Macchiato TU (TOTAL UTILITY) MU (MARGINAL UTILITY
0 0 -
1 20 20
2 35 15
3 45 10
4 50 5
5 53 3
6 55 2
7 56 1
8 56 0
9 55 -1
10 53 -2
Figure 4.1 Miguel Antonio’s Utility in Drinking Caramel Macchiatto
Law of diminishing
marginal utility

This law argues that as you increase


your intake of certain commonidity, you
will have a declining satisfaction on the
next units of the same commodity that
you would consume
Table 4.2 Combination of Good X and Y that will give Missy’s satisfaction rating of 5

Ordinals Values Point


A
Quantity of Good x needed
1
Quantity of Good Y needed
6

are based on B
C
2
4
4
2

rankings. D 5 1.5
Where: ∆Y is the change in the values of commodity Y
∆ 𝑌 𝑀𝑈𝑦 ∆X is the change in the values of commodity X
𝑀𝑅𝑆= =
∆ 𝑋 𝑀𝑈𝑥

∆𝑌 4 − 6 −2
Change from point A to B, 𝑀𝑅𝑆 = = = =2
∆𝑋 2 − 1 1

∆𝑌 −2
Points B to C 𝑓𝑟𝑜𝑚 𝐵 𝑡𝑜 𝐶 𝑀𝑅𝑆 = =− =1
∆𝑋 2

∆𝑌 −2
𝑓𝑟𝑜𝑚 𝐶 𝑡𝑜 𝐷 𝑀𝑅𝑆 = =− =1
Points C to D ∆𝑋 2
Three properties of preferences

01 completeness

02 transtivity

03 Non-satiation
• X is preffered to Y

• Y is prefered to X

• The concumer is indifferent between X and Y (if Missy is


indifferent, it means that the two goods are valued equally
Figure 4.3 Graph of indifference curve between two commodities Figure 4.4 The impossible interaction among indifference
curves.
Indifference Map
• An indifference map is a graph containing a set of
indifference curves showing two commodities among which
describe a person’s preferences.
The Budget Line

• Budget line is a graph that shows


the combination of goods or
services of a person, where the
total amount of money spent is
proportionate to his /her income.
It assumes that all people spend
within the level of their income.
Table 4.3 Yanna’s budget for food and
household itmes

Basket of goods Food (115/unit) Household Items Total Budget (Php)


(30/unit)
A 0 460 13,800
B 230 345 13,800
C 460 230 13,800
D 690 115 13,800
E 920 0 13,800
Figure 4.5 Budget Line of Yanna’s Budget for food and household items

∆ 𝐵𝑓 460 −230 230 1


𝑀𝑅𝑆= =− =− =−
∆ 𝐻𝑖 230− 345 115 2
Table 4.4 Yanna’s budget if there is an increase in income

Figure 4.6 Budget line of Yanna’s


Purchase if there is an increase in income
Table 4.5 Yanna’s budget if there is an increase income
Figure 4.7 Budget line of Yanna’s purchase if there is an increase in income
Thank you for
listening
Hope you learn a lot have a nice day everyone

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