Description
Customer behaviour study is based on consumer buying behaviour, with the customer playing the three distinct roles of user, payer and buyer.
Theory of Consumer Behavior
Economics 11
Theory of Consumer Behavior
? ?
?
Useful for understanding the demand side of the market. Utility - amount of satisfaction derived from the consumption of a commodity ….measurement units ? utils Utility concepts
?
cardinal utility - assumes that we can assign values for
?
utility, (Jevons, Walras, and Marshall). E.g., derive 100 utils from eating a slice of pizza ordinal utility approach - does not assign values, instead works with a ranking of preferences. (Pareto, Hicks, Slutsky)
Total utility and marginal utility
?
Total utility (TU) - the overall level of
satisfaction derived from consuming a good or service Marginal utility (MU) additional satisfaction that an individual derives from consuming an additional unit of a good or service.
?TU MU ? ?Q
?
Total utility and marginal utility
Example (Table 4.1): Q 0 1 2 3 4 TU 0 20 27 32 35 MU --20 7 5 3
? ? ? ?
5 6 7
35 34 36 30
0 -1 -4
TU, in general, increases with Q At some point, TU can start falling with Q (see Q = 6) If TU is increasing, MU > 0 From Q = 1 onwards, MU is declining ? principle of diminishing marginal utility ? As more and more of a good are consumed, the process of consumption will (at some point) yield smaller and smaller additions to utility
Total Utility Curve
TU 35 Total utility(in utils)
30 25
20 15 10 5 0 1 2 3 4 5 Quantity 6 Q Figure 4.1
Marginal Utility Curve
MU Marginal utility (in utils) 20 15 10 5 0 -5 1 2 3 4 5 6 Q
Quantity
Figure 4.2
Consumer Equilibrium
?
?
So far, we have assumed that any amount of goods and services are always available for consumption In reality, consumers face constraints (income and prices):
Limited consumers income or budget ? Goods can be obtained at a price
?
Some simplifying assumptions
?
? ? ?
Consumer’s objective: to maximize his/her utility subject to income constraint 2 goods (X, Y) Prices Px, Py are fixed Consumer’s income (I) is given
Consumer Equilibrium
?
Marginal utility per peso ? additional utility
derived from spending the next peso on the good
MU MU per peso ? P
Consumer Equilibrium
?
Optimizing condition:
MU X MU Y ? PX PY
?
If
MU X MU Y ? PX PY
? spend more on good X and less of Y
Simple Illustration
?
Suppose:
X = fishball Y = siomai
?
Assume: PX = 2 PY = 10
Numerical Illustration
Qx 1
2 3 4 5 6
TUX 30
39 45 50 54 56
MUX 30
9 6 5 4 2
MUx Px 15
4.5 3 2.5 2 1
QY 1
2 3 4 5 6
TUY 50
105 148 178 198 213
MUY 50
55 43 30 20 15
MUy Py 5
5.5 4.3 3 2 1.5
?
?
2 potential optimum positions Combination A: ? X = 3 and Y = 4
?
TU = TUX + TUY = 45 + 178 = 223
?
Combination B: ?
?
X = 5 and Y = 5
TU = TUX + TUY = 54 + 198 = 252
?
?
Presence of 2 potential equilibrium positions suggests that we need to consider income. To do so let us examine how much each consumer spends for each combination. Expenditure per combination
Total expenditure = PX X + PY Y ? Combination A: 3(2) + 4(10) = 46 ? Combination B: 5(2) + 5(10) = 60
?
?
Scenarios:
If consumer’s income = 46, then the optimum is given by combination A. .…Combination B is not affordable ? If the consumer’s income = 60, then the optimum is given by Combination B….Combination A is affordable but it yields a lower level of utility
?
end
doc_330105969.ppt
Customer behaviour study is based on consumer buying behaviour, with the customer playing the three distinct roles of user, payer and buyer.
Theory of Consumer Behavior
Economics 11
Theory of Consumer Behavior
? ?
?
Useful for understanding the demand side of the market. Utility - amount of satisfaction derived from the consumption of a commodity ….measurement units ? utils Utility concepts
?
cardinal utility - assumes that we can assign values for
?
utility, (Jevons, Walras, and Marshall). E.g., derive 100 utils from eating a slice of pizza ordinal utility approach - does not assign values, instead works with a ranking of preferences. (Pareto, Hicks, Slutsky)
Total utility and marginal utility
?
Total utility (TU) - the overall level of
satisfaction derived from consuming a good or service Marginal utility (MU) additional satisfaction that an individual derives from consuming an additional unit of a good or service.
?TU MU ? ?Q
?
Total utility and marginal utility
Example (Table 4.1): Q 0 1 2 3 4 TU 0 20 27 32 35 MU --20 7 5 3
? ? ? ?
5 6 7
35 34 36 30
0 -1 -4
TU, in general, increases with Q At some point, TU can start falling with Q (see Q = 6) If TU is increasing, MU > 0 From Q = 1 onwards, MU is declining ? principle of diminishing marginal utility ? As more and more of a good are consumed, the process of consumption will (at some point) yield smaller and smaller additions to utility
Total Utility Curve
TU 35 Total utility(in utils)
30 25
20 15 10 5 0 1 2 3 4 5 Quantity 6 Q Figure 4.1
Marginal Utility Curve
MU Marginal utility (in utils) 20 15 10 5 0 -5 1 2 3 4 5 6 Q
Quantity
Figure 4.2
Consumer Equilibrium
?
?
So far, we have assumed that any amount of goods and services are always available for consumption In reality, consumers face constraints (income and prices):
Limited consumers income or budget ? Goods can be obtained at a price
?
Some simplifying assumptions
?
? ? ?
Consumer’s objective: to maximize his/her utility subject to income constraint 2 goods (X, Y) Prices Px, Py are fixed Consumer’s income (I) is given
Consumer Equilibrium
?
Marginal utility per peso ? additional utility
derived from spending the next peso on the good
MU MU per peso ? P
Consumer Equilibrium
?
Optimizing condition:
MU X MU Y ? PX PY
?
If
MU X MU Y ? PX PY
? spend more on good X and less of Y
Simple Illustration
?
Suppose:
X = fishball Y = siomai
?
Assume: PX = 2 PY = 10
Numerical Illustration
Qx 1
2 3 4 5 6
TUX 30
39 45 50 54 56
MUX 30
9 6 5 4 2
MUx Px 15
4.5 3 2.5 2 1
QY 1
2 3 4 5 6
TUY 50
105 148 178 198 213
MUY 50
55 43 30 20 15
MUy Py 5
5.5 4.3 3 2 1.5
?
?
2 potential optimum positions Combination A: ? X = 3 and Y = 4
?
TU = TUX + TUY = 45 + 178 = 223
?
Combination B: ?
?
X = 5 and Y = 5
TU = TUX + TUY = 54 + 198 = 252
?
?
Presence of 2 potential equilibrium positions suggests that we need to consider income. To do so let us examine how much each consumer spends for each combination. Expenditure per combination
Total expenditure = PX X + PY Y ? Combination A: 3(2) + 4(10) = 46 ? Combination B: 5(2) + 5(10) = 60
?
?
Scenarios:
If consumer’s income = 46, then the optimum is given by combination A. .…Combination B is not affordable ? If the consumer’s income = 60, then the optimum is given by Combination B….Combination A is affordable but it yields a lower level of utility
?
end
doc_330105969.ppt