Part 1: Consumer behaviour

Smartbook 6

What is consumer behaviour in simple words and what is the objective

Given a certain budget,how does a consumer decide which goods and services to buy in the

To mathematically and logically model this decision-making process

under the assumption that individuals act rationally.

What is Utility

The satisfaction a consumer gets from the consumption of a good or service(want-satisfying power)

3 characteristics of utility:

-Are all goods/services useful

-Is utility subjective or objective

-Two methods of measuring utility

• No, some things can bring you utility but have little to no function. (An art lover buying a painting, nice to look at, but what else can you do with it)

• Subjective, what brings utility to one person might not bring utility to another person

• Cardinal Utility(numerical values) and ordinal utility(level of satisfaction based on comparisons in consumption)

Unit for utility

Utils

Whats the point of marginal utility if you know the total,like what does the marginal utility help economists with?

how satisfaction changes with each extra unit consumed.

(Law of diminishing marginal utility, decision making at the margin,pricing&value, Resource allocation(firms and governments))

Law of diminishing marginal utility simply put

as a person consumes more units of a good or service, the additional satisfaction (marginal utility) derived from each additional unit decreases. While total satisfaction may rise, the rate of increase slows down, meaning each extra unit adds less value than the one

Define:

Marginal utility

Total utility

• Extra satisfaction a consumer gets from consuming an additional unit of a particular product

• Total satisfaction derived from consuming a single product

How to calculate marginal utility

CHANGE

in total utility that results in the consumption of 1 more unit

(Total utility from 3 fries is 5 utils,total utility from 7 fires is 7 utils therefore marginal utility is 2 utils )

Total utility increases at ____ rate

Marginal utility is zero when total utility is

When marginal utility is falling,total utility is

(This all refers to the graphs)

Decreasing

Zero

Falling

Define:

Cardinal Utility

Total utility

• Maerure of satisafction using imegainary units called utils (considered numerical values)

• Cannot quantify satisfaction with utils but satisfaction is measured in order of preference

The main aim behind consumer behaviour is that consumers wish to

Maximise their total utility

What three dimensions form part of a typical situation for a consumer when deciding on what good/service to use their income on

• Rational behaviour

• Preferences

• Budget constraint /management

• Price

What’s rational behaviour

Person tries to use their money to get the greatest amount of utility from it (maximising total utility )

Each consumer has a clear-cut____ for specfifc good/services available in the market

Preference

• Difference between the budget constraint and budget management

• And why do consumers get limited salaries

• Does everyone have a budget limitation,to what extent

• Every consumer has a fixed, limited amount of income : Consumers utilise their budget fully (not more than what they have but not exactly less the budget)

• Because they can only provide limited human& property resources to society

• Yes, but not everyone faces the exact same budget limit; millionaires have a higher budget than lower income individuals

What’s the utility maximising rule

To maximise satisfaction, consumers should allocate their money income so that the last rand spent on each product gets the same amount of marginal utility

Are consumers’ choices only influenced by marginal utility

No by opportunity cost too

Rational behaviour is basically the comparison of

marginal costs and benefits

Why is marginal utility compared with marginal cost and not marginal revenue

Revenue is for firms to worry about not consumers. Consumers comparison is between UTILITY GAINED and COST PAID

consume/produce more only if the ______ is greater than or equal to the ____

extra benefit (MU)

extra cost (MC).

Two things consumers must do to maximise utility

• Money income

• Equilibrium

• Money income must be spent so that the last rand gains the same amount of marginal utility

• Consumers should be in equilibrium, meaning they would be worse off if they bought more of the good/service, knowing they will not gain extra utility from it

Formula that shows at what point a consumer will maximise their utility

When the price of a product declines,consumers can buy in gretaer qantities because their MU per rand spent increases/decreases/stays the same

increases