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Consumer Behavior: Compiler: Dr. Precila R. Bautista

This document provides an overview of key concepts in consumer behavior including utility, marginal utility, total utility, maximizing utility, the water-diamond paradox, and consumer surplus. It defines each concept and provides examples to illustrate them. Utility refers to the total satisfaction received from consuming a good and underlies the laws of supply and demand. Marginal utility decreases with additional consumption of a good while total utility is the aggregate satisfaction calculated by adding marginal utilities. The water-diamond paradox explains why diamonds have higher value than water despite water being more useful, due to their differing marginal utilities. Consumer surplus measures consumer satisfaction as the difference between what was paid versus willingness to pay.

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47 views

Consumer Behavior: Compiler: Dr. Precila R. Bautista

This document provides an overview of key concepts in consumer behavior including utility, marginal utility, total utility, maximizing utility, the water-diamond paradox, and consumer surplus. It defines each concept and provides examples to illustrate them. Utility refers to the total satisfaction received from consuming a good and underlies the laws of supply and demand. Marginal utility decreases with additional consumption of a good while total utility is the aggregate satisfaction calculated by adding marginal utilities. The water-diamond paradox explains why diamonds have higher value than water despite water being more useful, due to their differing marginal utilities. Consumer surplus measures consumer satisfaction as the difference between what was paid versus willingness to pay.

Uploaded by

JANNA CAFE
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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 6

CONSUMER BEHAVIOR

COMPILER : DR. PRECILA R. BAUTISTA


Learning objectives:
At the end of the chapter, will learn about:
- Utility
- Marginal utility
- Total utility
- Maximizing utility
- Water-diamond paradox
- Consumer surplus
UTILITY
- Is the total satisfaction received from consuming a good or
service.
- Underlying to the laws of demand and supply is the concept
of utility which gives explanation on how households and
economies target to achieve optimal satisfaction in dealing
with scarcity.
- It differs from person to person and time to time. Thus, it is
measured by how much a person is willing to pay in
exchange for a good in his own perspective.
Ex- buying a chocolate and willing to pay for P75 per piece
and then there comes a store where it sells it at P70. When
you buy at P75 it is the willingness to pay for P75 though
much lower for P70 in the other store.
MARGINAL UTILITY
- Is the additional satisfaction or amount of utility gained from
each extra unit of consumption although generally, utility
increase more of a good is consumed. However, in this case,
marginal utility decreases with each additional increase in the
consumption of a good.
- Since there is a certain limit of satisfaction, the consumer will
no longer receive the same pleasure from consumption once
that threshold is crossed. Ex- if you eat more chocolate bars,
the pleasure of each additional chocolate bar will be less than
the pleasure you received from eating the one before –
probably because you are starting to FEEL FULL or YOU
HAVE TOO MANY SWEETS FOR ONE DAY.
TOTAL UTILITY
- The aggregate sum of satisfaction gained from consuming a
given amount of goods. This could be calculated through
adding the marginal utilities of all the units purchased.

Chocolate Marginal utility Total utility


bars eaten
1 70 70
2 40 110
3 10 120
4 5 125
MAXIMIZING UTILITY
- Is a hypothesis explaining consumer behavior with consumer demand
theory and utility analysis. Economist assume the consumer is rational
and will thus maximize his or her total utility by purchasing a
combination of different products rather than more of one particular
product.
- It makes sense to think that people are generally motivated to do what is
best for them, to purchase the MOST SATISFYING GOODS, to make
the decisions that do more good than harm, to improve their overall
living standards and well-being, that is, to maximize their utility.
- Ex- instead of spending all of your money on two chocolate bars, which
has a total utility of 110, you should instead purchase the one chocolate
bar, which has a utility of 70, and perhaps a glass of milk, which has a
utility of 50. This combination will give you a maximized total utility of
120 but at the same cost as two chocolate bars.
THE WATER-DIAMOND PARADOX
- Confusing theory about water which is more useful than diamonds, water has cheaper
price.
- The paradox was explained by means of understanding of marginal utility and total utility.
- Households are willing to pay a higher price for goods with greater marginal utility.
- As we know, there is ample amount of water than diamonds. As such, water which is
plentiful has enormous total utility, but a low price because of low marginal utility. Diamonds,
however, have less total utility puzzling they are less plentiful, but a high price because of a
high marginal utility.
- Personal judgments can show diamonds are more costly than water because people
subjectively value them more highly. However, it still cannot explain why diamonds should
be valued more highly than an essential good such as water. In other words, consumers are
not choosing between all of the diamonds in the world vs all of the water in the world.
Undoubtedly, water is more VALUABLE. They are choosing between one additional
diamond vs one additional unit of water, this principle is known as marginal utility.
CONSUMER SURPLUS
- Is an economic measure of consumer satisfaction or utility.
- It is calculated by analyzing the difference between what
consumers pay for a good and how much he is willing to pay
for that.
- Consumer always like to feel like they are GETTING a good
deal in the goods and services they buy and consumer surplus
is simply an economic measure of this satisfaction.
Consider the example given, chocolate bar costs P70 but
then you are willing to pay for P75. Thus, as you purchase
that chocolate bar, you gain a P5 consumer surplus.
- Consumer surplus is the difference between what consumers
pay for a good and how much he is willing to pay for that.
THANK YOU!!
GOD BLESS US ☺
CTTO--

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