GROUP 3
Chapter 4: Consumer Behavior
Members:
Agela Perez
Lyme Rabulan
Erold Mirabueno
Angeline Mediodia
Japheth Probadora
Introduction
Consumer behavior refers to the study of how individuals,
groups, or organizations select, purchase, use, and dispose
of goods, services, ideas, or experiences to satisfy their needs
and desires.As markets become increasingly competitive and
dynamic, analyzing consumer behavior has become more
critical than ever in predicting trends, personalizing
experiences, and driving business success.as it helps them
design effective marketing strategies, improve customer
satisfaction, and build lasting relationships with their target
audiences.
Consumer Behavior
Consumer behavior refers to the way people decide what
products and services to buy, how they buy them, and why
they buy them.
It is basically the study of how consumers make choices when
it comes to spending their money.
Utility
n economics, the satisfaction or happiness that a person gets
from consuming a product is called utility. So when you eat a
box of pizza and it makes you happy or full, that satisfaction
is your utility. Utility helps us understand why people buy
certain goods—because those goods give them pleasure,
satisfaction, or happiness.
There are four key assumptions:
1. The spending on any good or service is exactly equal to the
individual's savings and income
– In reality, people sometimes buy beyond their budget or use
credit.
2. People are aware of the range of products available in the
market.
– But in truth, some people buy without exploring other
options, or simply because of peer pressure.
3. People are aware of the prices of the products in the market.
– But in urgent cases, like buying a toothbrush from the
nearest convenience store, people might not even check the
price.
4. People are aware of the capacity of the product.
– In reality, some people buy products without being sure if
they are durable or effective. For example, diet products that
promise results in seven days but fail to deliver.
Consumer Behavior: Measuring Utility and Indifference
Curves
1. Measuring Utility
Let’s begin by understanding why we measure utility.
Companies often conduct surveys to know whether people
like their products or services. What they’re trying to measure
here is utility, or the satisfaction a consumer gets from
consuming a product.
Now let’s visualize this concept through Table 4.1, which
presents Miguel Antonio’s utility in drinking caramel
macchiato. As you can see:
At 1 cup, his total utility (TU) is 20, and his marginal utility (MU)
is also 20.
As he drinks more, TU increases, but MU decreases.
By the time he drinks his 7th or 8th cup, the MU becomes zero
or negative, showing diminishing marginal utility.
This means the more of a product you consume, the less
satisfaction you get from each additional unit. This is the law
of diminishing marginal utility, and it’s a key idea in
understanding how people choose between goods.
🔹 2. Visualizing Utility
This behavior is illustrated in Figure 4.1, where we see:
TU curve rising but at a decreasing rate.
MU curve steadily declining, and even becoming negative.
This visual representation supports the theory that
consumption beyond a certain point can lead to
dissatisfaction.
🔹 3. Ordinal Utility and Ranking Preferences
Apart from measuring satisfaction in numbers (which we call
cardinal utility), we can also measure it in rankings, which is
known as ordinal utility.
An example is given in Table 4.2, where Missy always
purchases two goods—X and Y. Different combinations of X
and Y all give her the same satisfaction rating of 5. This
reflects her preference ranking, not exact values.
🔹 4. Indifference Curves and MRS
These combinations form an indifference curve, shown in
Figure 4.2.
The slope of this curve is called the Marginal Rate of
Substitution (MRS), which tells us how much of Good Y a
consumer is willing to give up to get one more unit of Good X.
Using the formula:
We can compute this slope between different points:
From A to B, MRS = -2
From B to C, MRS = -1
From C to D, MRS = -0.5
As you can see, MRS decreases, meaning the indifference
curve becomes convex to the origin, which is a standard
shape for such curves.
🔹 5. Properties of Indifference Curves
In analyzing these curves, we use three key assumptions:
Completeness – Consumers can rank all possible
combinations.
Transitivity – If A is preferred to B, and B to C, then A is
preferred to C.
Non-satiation – More is better.
You can see these properties in action in Figure 4.3, which
shows a typical indifference map of multiple curves.
Now, it’s important to note that indifference curves cannot
intersect, as shown in Figure 4.4. If they did, it would violate
the assumptions we just discussed, especially transitivity and
consistency.
🔹 6. Application and Interpretation
So how does this help in real life?
By using utility and indifference curves, economists can
understand:
How consumers make trade-offs,
How they choose between products based on satisfaction,
To conclude
Utility measures satisfaction.Total utility increases with
consumption, but marginal utility declines.Indifference curves
show combinations of goods that provide equal
satisfaction.The MRS decreases along the curve, forming a
convex shape.And finally, consumer decisions are guided by
preferences, trade-offs, and the desire to maximize
satisfaction.
Indifference Map
is a graph that shows different indifference curves. These
curves represent a consumer’s preferences between two
goods. Each curve shows a level of satisfaction, and there can
be many curves. A key feature is that indifference curves
never intersect, because that would mean the consumer has
conflicting preferences.
Example (Figure 4.3)
On the graph, if points A, B, and C are on the same curve, the
consumer feels the same level of satisfaction from each point.
When you move to a curve above, it means the consumer is at
a higher level of satisfaction. So, the higher the curve, the
more the consumer prefers it.
Example (Figure 4.4)
In theory, indifference curves are not allowed to intersect. If
they cross, it would mean one option is both better and equal
to another at the same time, which doesn’t make sense. That
would be a contradiction in consumer behavior.
Importance of Indifference Map
An indifference map is important because it helps explain how
consumers make choices between different goods. By
showing the different combinations of goods that give the
same satisfaction, it helps us understand the decision-making
process of consumers.
At the same time, it also connects to the concept of the budget
line, which represents the consumer’s spending limit.
Together, the indifference map and the budget line give us a
clearer picture of how consumers balance their preferences
with their limited income.
Consumer’s Choice
Consumers' choice is about how people make choices based
on their income, preferences, and the prices of goods. It
focuses on how we use tools like budget lines, indifference
curves, and Engel curves to understand these decisions.
In Figure 4.7, it shows what happens when prices go up but
the income stays the same. The budget line moves inward,
which means the person can buy less than before. This kind
of situation explains why people struggle when prices rise but
salaries don’t change.
Figure 4.8 shows three budget lines (₱5000, ₱4000, and ₱3000)
where the person reaches the same satisfaction level of 100
utils. It means that even with less money, the consumer can
still reach the same level of satisfaction by choosing different
combinations of goods. The main point is that people adjust
their choices depending on their budget.
This one shows three points on different indifference curves
using the same ₱5000 budget. Point 3 gives 300 utils, which is
the highest satisfaction. So even if the budget is the same,
some combinations of goods provide more satisfaction than
others. This explains why we aim for the best mix of products,
not just the most expensive ones.
In Figure 4.10, as income increases, the consumer starts
buying more of the goods. The income consumption line goes
up, and the Engel curve also shows a rising pattern. This is
what happens with normal goods—things we buy more of
when we earn more, like clothes, gadgets, or restaurant food.
Figure 4.11 explains the opposite case—inferior goods. These
are things people buy less of when their income increases.
The income consumption line bends backwards, and the
Engel curve goes down. A good example would be things like
instant noodles or cheap transportation—people tend to stop
buying them once they can afford better options.
In conclusion , consumer behavior helps us see how income
and prices affect what people buy. Normal goods go up with
income, while inferior goods go down. Budget lines and
indifference curves help show how people try to get the most
satisfaction from their money.
In summary, understanding utility, consumer preferences, and
indifference curves provides valuable insights into how
people make decisions. These tools allow economists to
predict behavior, while also helping businesses design better
products and pricing strategies.
