Reading Material 4-Consumers-Choice Part1

Reading Material 4
(1)
CONSUMER CHOICE
AND UTILITY
MAXIMIZATION
❖ CONSUMER
-one who demands goods and services
❖ CONSUMER SOVEREIGNTY
-consumers’ power to determine what is
produced since they are the ultimate purchasers
of goods and services
Product
❖ GOODS
-anything tangible that provides satisfaction to the needs, wants, and
desires of the consumer.
❖ SERVICES
-any intangible economic activities that contribute directly or
indirectly to the satisfaction of human wants.
▪ CLASSIFICATION OF TANGIBLE GOODS
a. Consumer goods – these are goods that yield

satisfaction directly to any consumer. These are primarily
sold for consumption, and not to be used for further
processing or as an input/ raw material needed in producing
another goods.
( e.g. soft drinks, bread, crackers, cellphone loads)
b. Essential goods – goods that are necessary in our
daily existence as human beings
c. Luxury goods – those which men may do without,

but which are used to contribute to his comfort and
well-being.
d. Economic good – good which is both useful
and scarce. (ex. Drinking Water)
e. Free good – a good which is abundant that

there is enough of it to satisfy everyone’s
needs without anybody paying for it. (ex. Air
and sunlight)
Maslow’s Hierarchy of Needs
Maslow’s hierarchy of needs identifies
the basic priorities of every consumer.
Abraham Harold Maslow (1908-1970)

He concluded that when one set of
need is satisfied, this kind of need
ceases.
MASLOW’S HIERARCHY OF NEEDS
1. Physiological needs – basic needs for sustaining human life
itself.
2. Safety Needs – these are the needs to be free of physical

danger and the fear of losing ones work, property, food or
shelter.
3. Social Needs – It covers the value of the sense of

belongingness, love, care, acceptance, and understanding of
family, relatives, friends, and to be accepted by others.
4. Esteem Needs – gives importance to self-esteem,
recognition, status of an individual.
5. Self- Actualization Needs –This is the highest need in the

hierarchy. These needs explain the worth of a person’s self-
development, growth and realization and achievement
UTILITY THEORY
Utility – the amount of satisfaction a

person gets from consuming a
product. Economists rate utility in
UTILS.
a. Total Utility- the total satisfaction that

a consumer derives from the
consumption of a given quantity of a
good or service in a particular time
period.
b. Marginal Utility – the additional
satisfaction that an individual derives
from consuming an extra unit of good
or service. (Marginal means “extra” or
“additional”.
(LDMU) LAW OF DIMINISHING MARGINAL
UTILITY
- states that consumption of more
successive units of the same good
increases total utility, but at a
decreasing rate because marginal utility
diminishes.
HYPOTHETICAL UTILITY SCHEDULE FOR SIOMAI
MU = TU
Unit
Purchased
Total Utility
(TU)
Marginal Utility
(MU)
Q
1 10 -
2 19 9
3 26 7 MU = TU2 – TU1
4 30 4
Q2 – Q 1
5 30 0
where:
6 26 -
4 TU2 = the new total utility
7 19 - TU1 = the original utility
7
Q2 = the new quantity
consumed
Q1 = the original quantity
consumed
Unit Total Utility Marginal
Purchased (TU) Utility (MU)
MU = 30 – 26
1 10 - 4-3
2 19 9
3 26 7 =4
4 30 4 1
5 30 0
6 26 -4 =4
7 19 -7
-Total utility, in general, increases as more and more units of the

product are consumed. However, at some point, when the
marginal utility is less than 0, total utility decreases.
- Marginal utility diminishes as the consumption of the same goods

becomes higher
Unit Total Utility Marginal
Purchased (TU) Utility (MU)
TU = Upper TU + Lower
1 10 - MU
2 19 9
3 2 7
6
4 3 4
0
5 3 0
0
6 2 -4
7 6 -7
1
9
-Total utility, in general, increases as more and more units of the
product are consumed. However, at some point, when the
marginal utility is less than 0, total utility decreases.
- Marginal utility diminishes as the consumption of the same goods

becomes higher
Total Utility (Utils)
Quantity
Marginal Utilty (Utils)
MU
Quantity
Summary of Utility
MU TU
Phase I diminishing increasing
Phase II zero maximum
Phase III negative diminishing
We can now conclude that the most
rational decision is to consume 4 pieces of
siomai, where TU, which is at its highest, or
to stop at fifth piece, which did not yield
any additional value of satisfaction.
The Equilibrium Market Basket
Preferences alone do not
determine the consumer’s
actions. Besides knowing the
consumer’s preferences, we
must also know his or her income
and the prices of commodities
to predict which market basket
he or she will buy.
Consumer’s money income
Is the amount of money he or she
can spend per unit of time.
Given the consumer’s tastes, economist assume that he
or she attempts to maximize utility. In other words,
consumers are assumed to be rational in the sense that
they choose the market basket or more generally, the
course of action that is most to their liking.
Example
How much of each commodity should Mrs. Walter
buy if her income is only $4 (purely hypothetical)
Marginal Utility derived by the Walters from various

quantities of food and clothing
Dollars worth
Commodi 1 2 3 4 5
ty
Marginal Utility (utils)
Food 20 16 12 10 7
Clothing 12 10 7 5 3
Dollars worth
Commodi 1 2 3 4 5
ty
Marginal Utility (utils)
Food 20 16 12 10 7
Clothing 12 10 7 5 3
Dollar Commodity MU
1 Food 20
1 Food 16
1 Food 12
1 Clothing 12
Total MU = 60
Number of food = 3
Number of clothing = 1
Assumptions:
More is better than less – Consumer always prefer
more of any good to less. More is always better ,
even if just a little better.
Completeness – Consumers can compare and
rank all possible baskets.
Transitivity – It is normally regarded as necessary
for consumer consistency.
Example: A consumer prefers basket A to basket B and
Basket B to basket C, then consumer also prefers A to
C.
Conditions:
The maximizing market basket must satisfy
two conditions:
1. It must be located on the budget line.
2. It must give the consumer the most
preferred combination of goods and
services.
Therefore, it is the market basket that
maximizes consumer satisfaction.
Sources:
▪ Slavin, S.L., (2009). Microeconomics 9th Edition. NY:
McGraw Hill Companies

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Reading Material 4

a. Consumer goods – these are goods that yield

c. Luxury goods – those which men may do without,

e. Free good – a good which is abundant that

Abraham Harold Maslow (1908-1970)

2. Safety Needs – these are the needs to be free of physical

3. Social Needs – It covers the value of the sense of

5. Self- Actualization Needs –This is the highest need in the

Utility – the amount of satisfaction a

a. Total Utility- the total satisfaction that

-Total utility, in general, increases as more and more units of the

- Marginal utility diminishes as the consumption of the same goods

- Marginal utility diminishes as the consumption of the same goods

Marginal Utility derived by the Walters from various

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