Consumer behaviour refers to

the study of consumer while engaged in

the process of consumption.
 Definition
Utility means the satisfaction obtained from consuming a
commodity.
Two Types of Approach
Cardinal Approach
The cardinal utility theory says that utility is measurable and by placing a
number of alternatives so that the utility can be added.
The index used to measure utility is called utils.
Ordinal Approach
The ordinal utility theory says that utility is not measurable but it can be
compared.
Ordinal approach uses the ranking of alternatives as first, second, third
and so on.
 TOTAL UTILITY (TU)
The total satisfaction that a person gets from the
consumption of goods and service.

MARGINAL UTILITY (MU)

The additional to total utility as a result of consuming one more units
of the same good or services.

Marginal Utility (MU) = Change in Total Utility

Change in Total Quantity

MU = TU/ Q
 Definition
The additional benefit which a person derives from a given
increase of a stock of a thing diminishes, other things being
equal, with every increase in the stock that he already has.
OR
Law of Diminishing Marginal Utility states that as
consumption increases more and more, marginal utility will be
less and less.
 TU increases from consumption of 1st unit of apple until the 5th
unit of apples. After the 5th unit of apples, TU will decrease.
Units of Total Utility Marginal Utility
Apples
1 20 20
2 35 15
MU will decrease
3 45 10 and become zero at
the 5th unit of apples
4 50 5
and further
5 50 0 consumption of
6 45 -5 apples will not
satisfy the consumer
7 35 -10 as the MU shows
8 20 -15 negative signs.
When TU is increasing, MU will be positive.
When TU is at its maximum, MU will be zero.
When TU is decreasing, MU will be negative.
 Definition
The Law of Equi-Marginal Utility (EMU) states that other
things being equal, a consumer gets maximum satisfaction
when he allocates his limited income to the purchase of
different goods, where the marginal utility derived from the
last unit of money spent on each item of expenditure tends to
be equal.
This is also known as conditions for maximum utility or
satisfaction.
 Conditions for Equilibrium
For consumer equilibrium, this condition must be fulfilled.

Condition 1: Every ringgit spent on every commodity must

yield the same marginal utility.
Marginal Utility of X = Marginal Utility of Y
Price of X Price of Y

Condition 2: Total expenditure of all goods must be equal to

the total budget allocated to maximize utility.

P1Q1 + P2Q2 + + PnQn = Total budget

 EXAMPLE: Arwin has an income of RM37 and the prices of goods P, Q and R are RM5, RM1 and RM4 respectively.

Condition 1 : Every ringgit spent on every Fulfilling condition 1, two combination of goods are obtained:
commodity must yield the same marginal utility. Combination 1 : 2P, 4Q and 1R
Combination 2 : 4P, 5Q and 3R

Quantity Product P Product Q Product R

Total MUP/PP Total Utility MUQ /PQ Total Utility MUR/PR
Utility
1 21 4.2 7 7 16 4
2 41 4 13 6 30 3.5
3 59 3.6 18 5 42 3
4 74 3 22 4 50 2
5 85 2.2 25 3 55 1.25
6 91 1.2 27 2 58 0.75
7 91 0 28 1 60 0.5

Condition 2 : Total Combination 1 : 2P, 4Q and 1R

expenditure of all goods must 2(5) + 4(1) + 1(4) = 18
be equal to the total budget Combination 2 : 4P, 5Q and 3R
allocated to maximize utility. 4(5) + 5(1) + 3(4) = 37
So, 4 units of Product P, 5 units of Product Q and 3 units of Product R will be purchased by Arwin.
 Definition
An indifference curve represents all the possible
combinations of two goods which will give the same level
of satisfaction.
Assumptions
1. Scale of preferences
2. Consumers preferences are transitivity
3. Rationality
4. Diminishing marginal rate of substitution
5. Concept of ordinal utility
An indifference schedule is a list of combination of two
goods that give equal satisfaction to the consumer.

Combinations Good Y Good X

A 12 2
B 6 4
C 4 6
D 3 8
E 2 12

The table above shows all the five combinations,

which will give the equal level of satisfaction.
An indifference curve represents all those combinations of two goods;
X and Y which yield the same level of satisfaction to a consumer.
 An indifference map shows a set of indifference curve.

The higher the indifference curve from the origin, higher will be the utility.
IC3 has the higher satisfaction.
 Marginal Rate of Technical Substitution
Refers to the rate at which one good is substituted for another good.

Characteristics of Indifference Curve

1. Indifference curve slopes downward from left to right.
2. Indifference curve are convex to the origin.
3. Higher indifference curves represent higher level of satisfaction.
4. Indifference curve never intersect each other.
5. Indifference curve does not touch the Y axis or X axis.
A budget line represents various combinations of two goods, which can be
purchased with a given amount of money at the given price of each unit.
1. Change in Consumers Income

An increase in consumers income will lead to a shift of the budget line to the right, A1B1.
A decrease in consumers income will shift the budget line to the left as represented by A2B2.
2. Change in Price of Good X

Budget Line Budget Line

30 30

25

20 20
AB
Good Y

15

Good Y
A1B1 AB
10 10

5
A1B1
0 0
2 4 6 8 10 12 14 2 4 6 8 10 12 14 16 18 20 22 24

Good X Good X
Good X

Price of good X increase from RM1 to Price of good X decrease from RM1 to
RM2 and price of good Y constant. RM0.50 and price of good Y constant.
3. Change in Price of Good Y

Budget Line Budget Line

30 30

25 25

20 20

AB AB
Good Y

Good Y
15 15
AB1 AB1
10 10

5 5

0 0
2 4 6 8 10 12 14 2 4 6 8 10 12 14

Good X Good X

Price of good Y increase from RM0.50 Price of good Y decrease from RM0.50
to RM1 and price of good X constant. to RM0.40 and price of good X constant.
A consumer is in equilibrium when he or she is consuming the best possible
combination of two goods with the given amount of income.

At point b, and e, the consumer will

have a lesser satisfaction at IC3
with the same amount of income

Consumer equilibrium is reached when

indifference curve tangent with budget
Line which represents best combination
of two goods with limited income
as point C.
 INCOME EFFECT
The income effect is defined as the effect on the purchases of the
consumer caused by changes in income with prices of goods remaining
constant.
PRICE EFFECT
Price effect explains what happens to the consumers equilibrium
position when the price of one good changes while the price of another
good and other factors remains constant.
SUBSTITUTION EFFECT
Substitution effect explains what happens to the consumers equilibrium
position when the price of both good changesprice of one rises and price of
another falls while other factors remains constant.
 Consumer surplus is defined as the excess of what
a consumer is willing to pay and what he/she actually pays.

Example : Suppose Sally who is fond of chocolates is ready to pay for each successive bar of
chocolate as shown in table below. Assume that Sally is willing to pay lower price for the successive
bar of chocolates. Assume the market price of one bar of chocolate is RM1.00.
CONSUMER SURPLUS = TOTAL VALUE (MARKET PRICE x NUMBER OF UNITS CONSUMED)
Price (RM)

Bars of
1 2 3 4 5
chocolate
2.50
CONSUMER SURPLUS Price (RM) 2.50 2.00 1.50 1.00 0.80

Consumer surplus = (2.50 + 2 + 1.50 + 1) (1 x 4)

1.00
= RM3.00
DD

Quantity
0
4