Consumer's Behaviour and Utility Maximization

Utility

is a measure of the relative satisfaction from or desirability of consumption of various goods and services.

Cardinal Approach

- Classical method of understanding utility

- Uses utils as measurement of satisfaction

Utils

- are a measure of satisfaction or happiness.

- are hypothetical numbers that are used to rank your satisfaction.

Ordinal Approach

- New classical method of examining utility

- Ranking the preferences of the consumers

Ex. Good, Better, Best

- Indifference Curve and budget line

Total Utility

- Is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity.

Marginal Utility

- is the extra satisfaction a consumer realizes from an additional unit of the product.

- is the change in total utility

Law of Diminishing Marginal Utility

- Total Utility is increasing while it is increasing the additional utility in your satisfaction is decreasing because Marginal utility is decreasing.

Consumer Behavior Theory

- Cardinal utility allows precise quantification of the marginal utilities upon which the utility-maximizing rule depends.

Rational Behavior

-The consumer is a rational person, who tries to use his or her money income to derive the greatest amount of satisfaction, or utility from it.

Preferences

- Buyers also have a good idea of how much marginal utility they will get from successive units of the various products they might purchase.

Budget Constraint

-At any point in time the consumer has a fixed, limited amount of money income.

Prices of Goods

- Every good carries a price tag and we assume that the price tags are not affected by the amounts of specific goods each person buys.

Income Effect

Change in a product's price affects real income and quantity demanded.

Substitution Effect

Change in price influences relative expensiveness and quantity demanded.

4 ASSUMPTIONS

• Rational Behavior

• Preferences

• Budget Constraint

• Price of Goods

Formula to compute for Marginal Utility:

TU₂ - TU₁

Formula to compute for the Marginal Utility per Dollar:

MU ÷ Price

Formula of Algebraic Restatement:

MU of Prod A = MU of Prod B

---

Price of A = Price of Prod A

Utility Maximizing Rule

To maximize satisfaction