Economics; chapter 5: Consumer behavior & utility maximisation notes

Chapter 5: Consumer Behaviour Indifference & Utility Maximization

Terminology:

 Utility = satisfaction or pleasure got from consuming a
good/service.

 Total utility (TU) = total amount of satisfaction a person derives
from consuming some specific quantity of a good/service.

 Marginal utility (MU) = change of total
utility that results from the consumption
of 1 more unit of a product.




 Weighted Marginal utility (MU/Price) =
per-rand value extra satisfaction a
consumer realizes from an additional
unit of that product.


Law of diminishing MU:
 Satisfaction declines as consumer acquires additional units of a
product.

 If successive units of a good yield smaller and smaller amounts of
MU, the consumer will buy additional product only if price falls.

 Hence, the demand curve for a given product slopes downward.

Consumer choice and budget constraint:

 Rational behaviour = Consumers try to maximise their utility with
available income.

 Preferences

,  Budget




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

 Prices = Goods are scarce relative the demand so every good carry
a price tag.




Theory of consumer behaviour:
 Numerical example:
Utility-maximizing combination of products A and B obtainable
with an income of R10