CH 6 – CONSUMER BEHAVIOR
 Utility
o The satisfaction or well-being that a consumer receives from
consuming some good or service
 Total Utility
o The total satisfaction resulting from the consumption of a given
commodity by a consumer
 Marginal Utility
o The additional satisfaction obtained by a consumer from consuming
one additional unit of a commodity
 The Law of Diminishing Marginal Utility
o The utility that any consumer derives
from successive units of a particular
product consumed over some period of
time diminishes as total consumption
of the product increases (Ceteris
paribus)
o I.e. Marginal utility falls as the level of
consumption rises
o E.g. For water, some minimum
quantity is very important and you
would give up a considerable sum of
money to obtain that quantity of
water (your marginal utility of that
basic quantity of water is very high),
as you consumer more than this
bare minimum, your marginal utility of
successive liters of water used over a period of time will
decline steadily
 Maximizing Utility
o A utility-maximizing consumer allocates expenditures so that the
utility obtained from the last dollar spent on each product is equal
o
o When expenditure is adjusted to maximize utility, the value to the
consumer of consuming the marginal unit of some good is just equal
to the opportunity cost – the value to the consumer of the money used
to make the purchase
 The Consumer’s Demand Curve
o Ceteris paribus, a rise in the price of a product leads each consumer to
reduce the quantity demanded of the product
o If the price of good x rises, then at the previous utility
maximizing consumption bundle we have (see right), in
order to maximize again the consumer will have to buy less of x, or
buy more of y
 Real Income
o Income expressed in terms of the purchasing power of money income
o The quantity of goods and services that can be purchased with the
money income
 Substitution Effect
o The change in the quantity of a good demanded resulting from a
change in its relative price (holding real income constant)
o The substitution effect increases the quantity demanded of a good
whose price has fallen and reduces the quantity demanded of a good
whose price has risen
 Income Effect
o The change in the quantity of a good demanded resulting from a
change in real income (holding relative prices constant)
o The income effect leads consumers to buy more of a product whose
price has fallen, provided that the product is a normal good
 Negative Sloping Demand Curve
o Because of the combined operation of the income and substitution
effects, the demand curve for any normal commodity will be
negatively sloped
o Therefore a fall in price will increase the quantity demanded
 Giffen Goods
o An inferior good for which the income effect out-weighs the
substitution effect so that the demand curve is positively sloped
o The good must be an inferior good so that the reduction in real
income leads households to purchase more of that good, take a large
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proportion of total household expenditure and therefore have a large
income effect
o If bread was a dietary staple, as it has been in the past, a rise in the
price of bread would therefore cause a large reduction in people’s real
income, leading people to eat more bread rather than alternatives,
which would not provide the same nutritional value to keep people
alive
Conspicuous Consumption Goods
o Some products are consumed not for their quality, but because they
have “snob appeal”
o Therefore, for some goods, the more expensive such a commodity
becomes, the greater might be its ability to confer status on its
purchaser
o E.g. Consumers might value diamonds, for example, precisely because
everyone knows they are expensive, therefore a fall in the price might
lead them to stop buying diamonds and to switch to a more
satisfactory object of conspicuous consumption
Consumer Surplus
o For any unit consumed, consumer surplus is the difference between
the maximum amount the consumer is prepared to pay for that unit
(the total value that consumers place on all units consumed of a
commodity) and the price the consumer actually pays (payment made
to purchase that amount of the commodity)
o The market demand curve shows the valuation that consumers place
on each unit of the product, therefore for any given quantity, the area
under the demand curve and above the price line shows the consumer
surplus received from consuming those units
The Paradox of Value
o Because the market price of a product
depends on both demand and supply,
there is nothing paradoxical in there
being a product on which consumers
place a high total value (such as water)
selling for a low price (because it is
plentiful) and hence having a low marginal value
o We must distingust total value (area under the curve) from marginal
value (height of the curve)
Attitude Surveys
o Attitude surveys often ask people which of several alternatives they
prefer, revealing total rather than marginal utilities
o However, where the decision is a marginal one regarding a little more
or a little less, total utility is not what will determine behavior