KINH TẾ VI MÔ Chapter IV quan nguyen

The Theories on Consumer Behavior
CONTENT
Theory on consumer’s utility
The principle of diminishing marginal utility
Consumer’s surplus
Consumer’s preferences
Budget constraint
Utility maximizing choice

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I. The Theories on Consumer Utility
1. Utility Theory
1.1. Utility (U)
- The benefit or satisfaction that a person gets
from the consumption of a good or service
- An abstract concept
- Unit –free
- Subjectivity (depends on consumer’s
perception)

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I. The Theories on Consumer Utility
1. Utility Theory

1.2. Total utility (TU)
- The total benefit or satisfaction that a person
gets from the consumption of goods and services
- Depends on the person’s level of consumption
– more consumption generally gives more total
utility

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I. The Theories on Consumer Utility
1. Utility Theory
 A numerical

indicator of a person’s satisfaction
 If one item is preferred to some alternative, the utility
from the item is greater than the alternative.
 Actual unit of measurement for utility is not important
(ordinal, not cardinal, ranking is sufficient)
 Consumers try to obtain the largest possible total
satisfaction (utility) from the market basket that they
buy with their incomes.

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I. The Theories on Consumer Utility
1. Utility Theory
1.3. Marginal utility (MU)
- The change in total utility resulting from a oneunit increase in the quantity of a good
consumed
U
MU 
Q

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I. The Theories on Consumer Utility
E.g. Utility for beer

6

Number of
cups

Utility

Marginal
utility

0

0

0

1

6

6

2

10

4

3

13

3

4

15

2

5

16

1

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I. The Theories on Consumer Utility
2. Principle of Diminishing marginal utility:
In a certain time period, continuous
consumption will tend to the increase in total
utility but a decrease in marginal utility
=> As more good is consumed, additional
utility consumer gains will be smaller and
smaller.

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I. The Theories on Consumer Utility
Application 1: Diminishing marginal utility
and demand curve


To a consumer, the larger marginal utility, the higher willingness
to pay.
 The smaller MU, the lower willingness to pay.
 The diminishing marginal utility explains the slope downward
demand curve.

Willingness to Pay:
 The maximum price that a buyer is willing and able to pay
for a good.
 Measures how much the buyer values the good or service.
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I. The Theories on Consumer Utility
Application 2: Diminishing marginal utility
and Consumer surplus






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Consumer Surplus: the maximum amount a
consumer will be willing to pay for a good depends
upon the expected utility (benefits) of that good.
CS = MUx – Px
A lower market price will increase consumer surplus
A higher market price will reduce consumer surplus

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I. The Theories on Consumer Utility







Maximum Price = $11
Market Price = $6
Quantity Purchased = 6
Assume: Price drops $1 for every additional unit sold.
Consumer Surplus = $15
$51 - $36 = $15
($11+$10+$9+$8+$7+$6) - ($6 x 6) = $15

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I. The Theories on Consumer Utility
Market
Price

$11
$10
$9
$8

$7
$6

D
1 2
11

3

4

5 6

Quantity Purchased

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I. The Theories on Consumer Utility
P

$11

$10

Total Consumer
Benefits

$9
$8

$7
$6

D
1
12

2

3

4

5

6

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Q


I. The Theories on Consumer Utility
P

$11
$10
$9

Consumer’s
Expense

$8
$7

$6

D
1
13

2

3

4

5

6

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Q


I. The Theories on Consumer Utility
P

Consumer Benefit
- Consumer Expense
CONSUMER SURPLUS!

$11

$10
$9
$8

$51 - $36 =

$7

$15

$6

D
1
14

2

3

4

5

6

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Q


I. The Theories on Consumer Utility
S

Pmax

Consumer
Surplus

PE

D
QE
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I. The Theories on Consumer Utility
Consumer’s surplus (CS)
The difference between the market price and the
price buyer is willing to pay
 The area below demand curve and above the Q
market price line

16

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II. The Theories on Consumer’s choice
1. Consumer’s preferences
- Some assumptions:
+ Preferences do not depend on good’s price or
income
+ People can sort all the possible combinations of
goods
they might consume into 3 groups: preferred, not
preferred and indifferent
+ Consumers prefer more to less
+ Consumer’s preference is transitivity
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Indifference Curves: An Example
Market Basket

Units of Food

Units of Clothing

A

20

30

B

10

50

D

40

20

E

30

40

G

10

20

H

10

40

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Indifference Curves: An Example
Clothing

50

The consumer prefers
A to all combinations
in the yellow box, while
all those in the pink
box are preferred to A.

B

40

H

30

E

A

20

D

G

10

10

20

30

40

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Food


Indifference Curves: An Example
Consumer may decide they are indifference
between B, A and D
 We can then connect those points with an
indifference curve


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Indifference Curves: An Example
Clothing

40

•Indifferent
between B, A,
&D
•E is preferred
to U1
•U1 is preferred
to H & G

B

50
H

E
A

30

D

20

U1

G

10
10

20

30

40

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Food


Indifference Curves


To describe preferences for all combinations of
goods/services, we have a set of indifference
curves – an indifference map
 Each indifference curve in the map shows the
market baskets among which the person is
indifferent.

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Indifference Map
Clothing

Market basket A
is preferred to B.
Market basket B is
preferred to D.

D

B

A
U3

U2
U1
Food

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Indifference Curves - Characteristics
1.

Indifference curves slope downward to the
right.

If it sloped upward it would violate the
assumption that more is preferred to less.


Some points that had more of both
goods would be indifferent to a basket
with less of both goods

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Indifference curves- Characteristics
2. Indifference curves can not cross
 Violates assumption that more is better
 Why? What if we assume they can cross.

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