consumer behavior
Chapter 1 – consumer behavior 1. Decision making at margin marginal cost: the additional cost of consuming or producing one more unit of a good marginal benefit: the additional benefit of consuming or producing one more unit of good
Utility: satisfaction derived from consuming units of good consumed in a given period of time
Marginal utility: additional satisfaction gained from consuming an extra unit of good within a period of time
2. The law of diminishing utility marginal utility of good declines as consumption of goods increases. Each unit gives less and less utility. Tendency for marginal utility to decline is law of diminishing marginal utility.
Assumption: consumers must be rational, consumers only purchase two goods, good X & Y, Px= 1, Py= 3 consumer’s monthly income is RM 18. Base on LDMU, there are 2 condition to maximize satisfaction.
MUX/PX = MUY/PY, consumer must fully utilize the given income.
3. Principles of law diminishing marginal utility
Choice D will be made. At equilibrium, consumer maximizes his satisfaction. Consumer equilibrium is achieved when the marginal utility he gets from the last dollar spent of his expenditure of the different goods consumed is equal.
4. Weakness of marginal utility
- Utility cannot be measured in absolute sense. We cannot say exactly how much marginal utility of goods exceeds another.
- Marginal utility is based on satisfaction, consumers believe they will gain from that good. Believes are affected by advertising. Consumers may not get the necessary satisfaction they thought they would get.
- Some people associate status with price. Marginal utility theory cannot explain demand for good which has upwards slopping demand curve.
5. Budget line
Show the combination of two goods a consumer can buy at a given income and price of the goods.
6. Factors influencing budget line
- Income: changes in income cause a parallel shift. Increase in
Utility: satisfaction derived from consuming units of good consumed in a given period of time
Marginal utility: additional satisfaction gained from consuming an extra unit of good within a period of time
2. The law of diminishing utility marginal utility of good declines as consumption of goods increases. Each unit gives less and less utility. Tendency for marginal utility to decline is law of diminishing marginal utility.
Assumption: consumers must be rational, consumers only purchase two goods, good X & Y, Px= 1, Py= 3 consumer’s monthly income is RM 18. Base on LDMU, there are 2 condition to maximize satisfaction.
MUX/PX = MUY/PY, consumer must fully utilize the given income.
3. Principles of law diminishing marginal utility
Choice D will be made. At equilibrium, consumer maximizes his satisfaction. Consumer equilibrium is achieved when the marginal utility he gets from the last dollar spent of his expenditure of the different goods consumed is equal.
4. Weakness of marginal utility
- Utility cannot be measured in absolute sense. We cannot say exactly how much marginal utility of goods exceeds another.
- Marginal utility is based on satisfaction, consumers believe they will gain from that good. Believes are affected by advertising. Consumers may not get the necessary satisfaction they thought they would get.
- Some people associate status with price. Marginal utility theory cannot explain demand for good which has upwards slopping demand curve.
5. Budget line
Show the combination of two goods a consumer can buy at a given income and price of the goods.
6. Factors influencing budget line
- Income: changes in income cause a parallel shift. Increase in