CHAPTER 7
Consumer behaviour: in the analysis of consumer behaviour it is assumed that every consumer attempts to maximise
his or her satisfaction of wants by consuming goods and services. The aim is thus to obtain the highest obtainable
level of total utility.
Utility: expresses the degree of satisfaction that a household or consumer derives or expects to derive from the
consumption of a good or service
Utils: units of utility
Marginal utility: the extra or additional utility that a consumer derives from the consumption of one additional unit
of a good. If identical units of a good are consumed one after the other, the marginal utility will decrease until it
reaches zero. Thereafter it becomes negative.
Law of diminishing marginal utility: the marginal utility of a good or service eventually declines as more of it is
consumed during any given period.
Total utility: the sum of all marginal utilities. Total utility increases as long as marginal utility is positive. It reaches
maximum when marginal utility is zero (i.e. when the consumer is satiated) and the decreases when marginal utility
becomes negative.
Disutility: Negative utility
Weighted marginal utility: the marginal utility per unit divided by the price per unit
You have 10 apples.
Total, average and marginal values: Total value: 10
When a total value is rising, the corresponding marginal value is positive. You add 6 apples.
When a total value is falling, the corresponding marginal value is negative Marginal value: 6
When a total value reaches a maximum or a minimum, the corresponding marginal Total value is now 16
value is zero. Average value: 16/2 = 8
When the marginal value is lower than the average value, the average value falls You add 2 apples
When the marginal value is higher than the average value, the average value Total value is now 18
increases Marginal value is now 2
When the marginal value is equal to the average value, the average value remains Average value: 18/3 = 6
unchanged
Two conditions of consumer equilibrium:
1. The combination of goods purchased must be affordable
2. The weighted marginal utilities of the different goods must be equal
Steps to calculate consumer equilibrium:
1. Calculate the marginal utility of both products.
2. Divide the marginal utility values by the price to determine the weighted marginal utility (MU/P).
3. Identify the quantities where weighted marginal utilities (MU/P) for both products are the same.
4. Look at the income constraint.
Consumer behaviour: in the analysis of consumer behaviour it is assumed that every consumer attempts to maximise
his or her satisfaction of wants by consuming goods and services. The aim is thus to obtain the highest obtainable
level of total utility.
Utility: expresses the degree of satisfaction that a household or consumer derives or expects to derive from the
consumption of a good or service
Utils: units of utility
Marginal utility: the extra or additional utility that a consumer derives from the consumption of one additional unit
of a good. If identical units of a good are consumed one after the other, the marginal utility will decrease until it
reaches zero. Thereafter it becomes negative.
Law of diminishing marginal utility: the marginal utility of a good or service eventually declines as more of it is
consumed during any given period.
Total utility: the sum of all marginal utilities. Total utility increases as long as marginal utility is positive. It reaches
maximum when marginal utility is zero (i.e. when the consumer is satiated) and the decreases when marginal utility
becomes negative.
Disutility: Negative utility
Weighted marginal utility: the marginal utility per unit divided by the price per unit
You have 10 apples.
Total, average and marginal values: Total value: 10
When a total value is rising, the corresponding marginal value is positive. You add 6 apples.
When a total value is falling, the corresponding marginal value is negative Marginal value: 6
When a total value reaches a maximum or a minimum, the corresponding marginal Total value is now 16
value is zero. Average value: 16/2 = 8
When the marginal value is lower than the average value, the average value falls You add 2 apples
When the marginal value is higher than the average value, the average value Total value is now 18
increases Marginal value is now 2
When the marginal value is equal to the average value, the average value remains Average value: 18/3 = 6
unchanged
Two conditions of consumer equilibrium:
1. The combination of goods purchased must be affordable
2. The weighted marginal utilities of the different goods must be equal
Steps to calculate consumer equilibrium:
1. Calculate the marginal utility of both products.
2. Divide the marginal utility values by the price to determine the weighted marginal utility (MU/P).
3. Identify the quantities where weighted marginal utilities (MU/P) for both products are the same.
4. Look at the income constraint.
