This part is an introduction to the theory of Consumer behavior which is very key in microeconomics since the consumer sits at the center of microeconomics

1. The theory of Consumer behavior
• Consumer behavior is the study of
how individual consumers, groups or
organizations; select, buy or use goods
and services to satisfy their needs or
wants.
• It therefore refers to the actions of
individuals in the market place and the
main motives behind those actions.
• Lauden and Bitta look at consumer
behavior as the decision process and
physical activity which individuals
engage in when evaluating, acquiring,
using or disposing of goods and
services.

2. Nature of Consumer behavior
Consumers optimization problem
Individuals consumption decision are made
with the goal of maximizing total
satisfaction from consuming various goods
and services,
subject to..
The constraint that spending on goods and
services exactly equals the individuals
money income.
Consumer behavior is
influenced by;
• Marketing factors such as design,
price, promotion, packaging,
positioning and distribution.
• Personal factors such as age,
education, gender and income
level.
• Social factors such as social
status, and family issues
• Cultural factors such as religion
• Psychological factors such as
buying motive

3. Consumer theory (ii) Requires that consumers can rank all
consumption bundles based on the level of
satisfaction they would receive from consuming
the various bundles
The consumer theory assumes
that;
(i) Buyers are completely
informed about;
• Range of products available
• Prices of all products
• Capacity of products to
satisfy
• Their income

4. Properties of Consumer preferences
(iii) Non satiation
More of a good is always preferred
to less
(i) Completeness
For every pair of consumption bundles, A and B,
the consumer can say one of the following;
• A if preferred to B
• B is preferred to A
• The consumer is indifferent between A and B
(ii) Transitivity
If A is preferred to B, and B is preferred to C,
then A must be preferred to C

5. Utility • Utility is a psychological phenomenon that
implies the satisfying power of a good or
service
• It differs from a person to person and it
depends on persons mental attitude. The
measurability of utility is always a matter of
contention
Utility
These are benefits consumers
obtain from goods and
services they consume.
Utility Function
It shows an individuals
perception of the utility level
attained from consuming each
consumable bundle of goods.

6. Cardinal Utility approach to
consumer behavior • However, it has been raised with passage of
time that the cardinal measurement of utility is
not possible and hence less realistic.
• There are many difficulties in measuring utility
numerically, as utility derived by the consumer
from a good or service depends on a number
of factors such as mood, interest, taste or
preferences.
 Many traditional economists like
Alfred Marshall hold a view that
utility is measure quantitatively
like length, weight, height or
temperatures.
 This was based on cardinal
measurement of utility for which
these neo classical economists
coined the term “util” as the unit
of utility.
 Accordingly, one util is equal to
one unit of money and there is
constant utility of money.

7. Ordinal utility
• In this way, measurement of utility is ordinal
i,.e. qualitative based on ranking of
preferences for commodities.
• For example, suppose a person prefers tea to
coffee and coffee to milk. He or she can not
tell subjectively; his or her preference. i.e.,.
Tea is better than coffee and coffee is better
that milk.
• This approach is propounded
by modern economists J.R
Hinks, R.G.D Allen who
argue that it is not possible to
measure utility quantitatively.
• Modern economists hold that
“a person can introspectively
express whether a good or
service provides more, less or
equal satisfaction when
compared to one another.

8. Indifference curves U=f(X,Y)=K
Assumptions of and indifference curve
• Rational consumers
• Two commodities
• Utility is measured ordinally
• Diminishing marginal rate of substitution
• Consistence and transitivity of choice
• An indifference curve is a locus of points –
particular combinations or bundles of
goods which yield the same level of utility
(satisfaction) to the consumer so that he is
indifferent as to the particular combination
he consumes.
• It shows a combination of two goods that
gives the same level of satisfaction to the
consumer.
• Each point on the indifference curve shows
that the consumer is indifferent between
the two and all points give him the same
utility.

9. Properties of an indifference
curve • Indifference Curves analysis
They include the following;
• Negatively and downward
sloping
• Further away from the
origin and indifference
curve lies, means more
satisfaction.
• Indifference curves do no
intersect
• Convex to the origin

10. Indifference curves
analysis Cont’

11. Indifference map

12. MRS Cont’

13. Marginal Utility Relationship between TU & MU
Consumer equilibrium
Under cardinal approach, the consumer is in
equilibrium when he equates marginal utilities of
goods consumed to the prices paid for those goods.
MU(X) =Px (X)
Addition to total utility attributable
to the addition of one unit of a good
to the current rate of consumption,
holding constant the amounts of all
other goods consumed.
MU𝑥 =
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑡𝑜𝑡𝑎𝑙 𝑈𝑡𝑖𝑙𝑖𝑡𝑦
𝐶ℎ𝑎𝑛𝑔𝑒 𝑖𝑛 𝑄𝑡𝑦 (𝑋)
Quantity TU MU
0 0 -
1 5 5
2 9 4
3 12 3
4 14 2
5 15 1
6 15 0
7 13 -2

14. Consumers Budget line • A budget line therefore shows all the
combinations of two goods.
• The consumer can buy spending his given
money income at their given prices
• All those commodities which are with in the
reach of the consumer will lie on the budget
line.
It Shows all possible commodity
bundles that can be purchased at
given prices with a fixed money
income.
In an attempt to attain more and
more satisfaction, the consumer
experience two major constraints;
(i) He has to pay the prices for
goods and services
(ii) He has limited money income
with which to purchase the
goods

15. Budget line Cont’

17. Shifting budget lines

18. Individual consumer
demand • Deriving the demand curve

19. Market demand and marginal benefit
• Derivation of market demand

20. Substitution and income effects

21. • Summary of substitution and income effects