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Week 3

The document discusses consumer behavior and utility management, defining key terms such as total utility, marginal utility, and weighted marginal utility. It explains the law of diminishing marginal utility, consumer choice under budget constraints, and the theory of consumer behavior, emphasizing rational behavior and preferences. Additionally, it covers the derivation of the demand curve through price changes and the effects of substitution and income on demand.

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melindier2006
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4 views3 pages

Week 3

The document discusses consumer behavior and utility management, defining key terms such as total utility, marginal utility, and weighted marginal utility. It explains the law of diminishing marginal utility, consumer choice under budget constraints, and the theory of consumer behavior, emphasizing rational behavior and preferences. Additionally, it covers the derivation of the demand curve through price changes and the effects of substitution and income on demand.

Uploaded by

melindier2006
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

CONSUMER

BEHAVIOUR AND
UTILITY MANAGEMENT
Terminology
Utility: Satisfaction someone gets from consuming goods/ services

Total Utility (TU): Total amount of satisfaction someone gets from consuming a
specific amount of goods/ services

Marginal Utility (MU): Extra satisfaction someone gets from consuming an


additional unit of a product
Change in total utility as a result of consumption of 1 more unit of
product
MU = Change TU/ Change Quantity

Weighted Marginal Utility: Per-Rand-Value extra satisfaction from an additional


unit of product
WMU = MU/ Price

Law of Diminishing Marginal Utility (MU)


 Satisfaction declines as consumption goes up
 Successive units Decrease MU, consumers will only buy additional products if
price decrease
 Demand curve Slopes Downward

Consumer choice and budget constraints


Rational behaviour
 Consumer, Max utility within available income

Preferences
Budget constraints
 Consumer: fixed, limited, amount of monetary income

Price
 Goods scarce relative to demand + Price tag
Theory of consumer behaviour
Cardinal approach
 Assume we can measure utility
 Rational Behaviour: Assume consumers are rational (Maximise utility with
income)
 Preferences: Consumers have preferences
 Budget Constraints: Limited amount of money
 Price: Everting has a price

Numerical Example
 Compare MU
 Compare per-rand value (MU/Price)
 Choose highest
 Check budget for next item

Algebraic restatement
 MU of A/Price of A = MU of B/ Price of B

Optimum achieved
 Make assumptions about people’s preference
 Money income allocated that last rand spend on products yields same/ extra
marginal utility

Deriving the Demand Curve


 Price Change = Demand Change

Substitution effect
 Change in production price influences relative expensiveness and demand
quantity

Income effect
 Change in production price influences customers real income and demand
quantity

Indifference curve analysis


 Show consumer behaviour

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