TOPIC 5
THEORY OF CONSUMER
BEHAVIOUR
CONSUMER BEHAVIOUR
• DEFINITION:
• The study of the consumption pattern of a
consumer.
• i.e: The study of how consumer purchases
various of goods and services with his limited
income to achieve satisfaction.
UTILITY CONCEPT
• Utility means the satisfaction obtained from
consuming goods and services.
• OR
• Utility is the ability or the power of goods and
services to satisfy the wants of a consumer.
• Utility is measured by how much you are
willing to pay for something.
• There are two types of utility approaches:
1. CARDINAL APPROACH
• The cardinal approach says that utility is
measurable.
• The unit used to measure utility is called utils.
• For example: eating an apple = 5 utils
eating an orange = 8 utils
• The higher the utility given the higher is the
consumers’ satisfaction from consuming the
goods.
ORDINAL APPROACH
• Ordinal approach assume that utility cannot be
measured but can be rank.
• Consumer equilibrium or maximum utility
(satisfaction) is achieved using indifferent
curve (IC) and budget line (BL) analysis.
THE NATURE OF CONSUMER
PREFERENCE
• Scale of preference
any combination of good consumer chooses is
based on his preferences
• Consumer’s preference are transitive
if consumer prefers burger to fried chicken and
fried chicken to pizza, it means he prefers
burger to pizza
• Rationality
consumer is rational and he seeks to maximize
his satisfaction
INDIFFERENCE SCHEDULE
• Indifference schedule EXAMPLE:
is a list of combination Combination Apple Orange
A 12 2
of two goods that gives
B 6 4
equal satisfaction to the
consumer C 4 6
D 3 8
E 2 12
INDIFFERENCE CURVE (IC)
• An indifference curve represent all the possible
combination of two goods which will give the
same utility (satisfaction)
DIAGRAM
CHARACTERISTIC OF IC
1. IC curve downward sloping
1. 2. convex to the origin
CHARACTERISTIC OF IC
3. Higher IC represents higher level of
satisfaction
CHARACTERISTIC OF IC
4. IC never intersect with each other
CHARACTERISTIC OF IC
5. IC does not touch horizontal and vertical axis.
BUDGET LINE (BL)
• It is a line showing various combinations of
two goods which can be purchased with a
given amount of money and given price unit.
• Example:
• A consumer has an income of RM12 to
purchase two goods apple and orange. The
price of apple is RM 1.00 and the price of
orange is RM 0.50.
SOLUTION
• If he buys all apple, therefore he gets _______
• If he buys all orange, he gets ________
• Draw the budget line:
CONSUMER EQUILIBRIUM
• Consumer equilibrium is achieved when the
consumer consumes the best possible
combination of two goods with a given amount
of income.
• i.e : the indifference curve is tangent to the
budget line.
DIAGRAM
IC
EXAMPLE
• Answer the questions based on the following diagram
Good Y
A
18
B
10
C
5 IC
8 10 12 Good X
EXAMPLE ..Cont…
a) At which point does the consumer realize
equilibrium
b) How many units of good X and good Y are
purchased by the consumer?
c) If the price of good X is RM1.00 and good Y
is RM 0.50, what is the consumer income?
