1. BAEB602
MICROECONOMICS
CHAPTER 4
THEORY OF CONSUMER BEHAVIOUR
PREPARED BY:
Nur Suhaili Ramli
School of Marketing and
Entrepreneurship (SoME)
FACULTY OF BUSINESS AND MANAGEMENT

2. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
Objectives
TOPIC
 Define total utility and marginal utility
 Describe the meaning of the Law of Diminishing Marginal Utility.
 Explain the marginal utility theory of consumer choice.
 Use marginal utility theory to predict the effects of changing prices and incomes.
Slide 2 of 17

3. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
Marginal Utility Theory
TOPIC
 Total Utility (TU)
 Total utility is the total amount of satisfaction obtained from the consumption
of a good or service.
 Marginal Utility (MU)
 Marginal utility is the additional satisfaction obtained from the consumption
of one more unit of good or service. Marginal utility is computed by taking
the change in total utility divided by the change in the quantity of a good
consumed i.e:
MU = TU / Q where
MU = marginal utility
 TU = change in total utility
 Q = change in quantity of a good consumed
Slide 3 of 17

4. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
The Law of Diminishing Marginal Utility
TOPIC
 Most of us spread our incomes over many different kinds of goods. One of the
reasons for such behavior is that consuming more and more of any one good
reduces the marginal, or extra, satisfaction we get from the further consumption
of the same good.
Slide 4 of 17

5. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
Example
TOPIC
 Illustrates the concepts that we have just discussed. Assuming that
Jane loves pizza, and she visits a pizza restaurant and consumed 5
slices of pizza.
Slide 5 of 17

6. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
Maximizing Total Utility
TOPIC
 Consumer is said to be in equilibrium if he/she has selected the combination of
goods and services that maximize his/her total utility.
 In considering the consumer equilibrium, the following assumptions are made
for the individual consumer:
 Has a limited income
 Acts in rational manner
 Aims to maximize his/her total utility subject to the income constraint.
Slide 6 of 17

7. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
Maximizing Total Utility
TOPIC
 Total utility is maximized when all the consumer’s income is spent and when the
marginal utility per dollar spent is equal for all goods. Assuming that only two
goods are consumed, the utility-maximizing rule is as follow:
 Mux = MUy
Px Py
Where MUx is the marginal utility derived from the last unit
of X consumed, MUy is the marginal utility derived from
the last unit of Y consumed, Px is the price per unit of X,
and Py is the price per unit of Y.
Slide 7 of 17

8. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
Example
TOPIC
Price for a bottle of mineral is RM1.50 and a muffin is RM1. what is the maximize utility to meet RM9 of income?
Slide 8 of 17

9. CHAPTER 4: THEORY OF CONSUMER BEHAVIOUR
Consumer Equilibrium and the Law of Demand
TOPIC
 Based on the examples discussed, the demand curve for muffin can be derived. When the
price of muffin is RM1 as shown, Brian chose to consume 3 muffins. When price of muffin
fall to RM0.50, Brian’s consumption of muffins increases to 6. This data can be
summarized as follows:
 Price = RM1, Quantity demanded for muffin = 3
 Price = RM0.5, Quantity demanded for muffin = 6
Therefore, with this data, we can plot the demand curve for muffin.
Slide 9 of 17