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Consumer Theory

This document discusses key concepts in microeconomics including consumer theory, utility, production, and costs. It explains that consumer theory studies how individuals spend money based on preferences and budgets. Utility represents satisfaction from consuming goods, and consumers aim to maximize utility given constraints. Production involves using inputs like capital and labor to create outputs, while costs represent monetary values spent in production and consumption. Understanding these microeconomic foundations is important for analyzing demand, pricing, and business profitability.

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Kyla Torcatos
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28 views12 pages

Consumer Theory

This document discusses key concepts in microeconomics including consumer theory, utility, production, and costs. It explains that consumer theory studies how individuals spend money based on preferences and budgets. Utility represents satisfaction from consuming goods, and consumers aim to maximize utility given constraints. Production involves using inputs like capital and labor to create outputs, while costs represent monetary values spent in production and consumption. Understanding these microeconomic foundations is important for analyzing demand, pricing, and business profitability.

Uploaded by

Kyla Torcatos
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Subject:

Microeconomics

Rhodora G. Pagatpat
Consumer Theory
Consumer theory is the study of how people decide to
spend their money based on their individual preferences
and budget constraints.

 Understanding the individuals taste and income is


important because it dictates the demand curve
which is the relationship between the price of a good
or services and the quantity demanded and on the
shape of the economy

 Consumer spending drives a large chunk of the


countries gross domestic product (GDP). If people cut
down on purchases, then demand for goods and
services will go down, decreasing company profits
and all the rest of the things that make the economy
 (factors of production )
Utility and Satisfaction
 Utility is an economic term used to represent
satisfaction or happiness.

 It is a measure of satisfaction an individual gets from


the consumption of the commodities.
 It is a measurement of usefulness that a consumer
obtains from any good. It is a measure of how much
one enjoys a movie, favorite food or other goods

 Utility is the cause and satisfaction is the effect. The


utility is the inherent ability of the commodity to satisfy
a want and satisfaction is what comes from the
consumption of that commodity
Marginal Utility and Total Utility
 Total Utility is the satisfaction gained by a person from
consumptions of goods or services.
> the total amount of happiness a consumer
derives from a good at any particular level of
consumption.

 Marginal Utility is the addition or subtraction in total


utility from consumption of any particular good or
services when it comes to a particular person or
group.
> the change in total utility that a consumer
experiences when one more unit of a good is consumed.

Ie. If you buy a bottle of water and then a second one,


the utility gained from the second bottle of water is the
marginal utility
Utility Maximization
 A strategic scheme where individuals and companies
seek to achieve the highest level of satisfaction from their
economic decision.

 Utility maximization is important because it allows


consumer ( individuals or organization ) to satisfy their
needs within budget limitations. This means that the
consumer wants to achieve the highest utility while
spending less.

 It is also important to understand Utility maximization


because it directly influences demand, and therefore
price of that good or service.
Utility Maximization Rule
“ States that a consumer should buy goods to the point
where the last peso spent on every good provided the
same marginal utility as the last peso spent on every
good.”
How consumer react to
changes in income and pricing?

 The income effect identifies the change in consumer’s


demand for goods and services based on their
income. As one income rises, they will begin to
demand more goods and As one income decrease it
results in lower demand.

 A consumer buys goods as long as the marginal utility


for each additional unit exceeds its price. A consumer
stops consuming additional goods as soon as the price
exceeds the marginal utility.
Production and cost
 Production is the process of producing goods and
services to satisfy human wants.
 It is the process by which different inputs including the
capital, labor and land are used to create outputs in
the form of production and service.
 Total Product refers to the total volume or amount of
final output produced by a firm using given inputs in a
given period of time.
 Marginal Product – the increase in output per unit
increase in input is called marginal product. Marginal
product is the addition to Total Product when an extra
factor input is used
 Average Product refers to the output per unit of
factors input or the average of the total product per
unit.
 Cost is the monetary value of goods and services
purchased by producers and consumers.
 A consumer typically equate cost with the price of
goods or a services
 For manufacturer or service provider, cost is the
amount of money spent to produce something and is
subtracted from the revenue earned from selling the
goods and services to determine the profit
 Total cost is the overall amount spent to make a
certain amount of product. To get the Average cost
divide the total cost by the number of output.
Marginal cost is the change in total cost when another
unit is produced. An extra expense of producing one
additional unit.
 Fixed cost are the cost that don’t change based on
how may items was produced
 Variable cost increase or decrease depending on
how much is produced.
 Cost is important in economics because a process
must be profitable in a free market for sustainability.
Unprofitable processes will eventually become
insolvent

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