Consumer Behavior I
ECON101. Principles of Microeconomics
Fall 2023
Instructor: Dr. Yiwei Wang
Introduction
We discussed the market demand in Chapter 4. In this chapter, we
take a closer look at how consumers behave. Key topics:
• The buyer’s problem
• From the buyer’s problem to demand curve
• Consumer surplus
The Buyer’s Problem
• What do you like?
• How much does it cost?
• How much money do you have?
The Buyer’s Problem
What do you like?
• Everyone has different likes and dislikes, but we assume
everyone has two things in common:
• We all want the “biggest bang for our buck”
• What we actually buy reflects our tastes and preferences
The Buyer’s Problem
How much does it cost?
• We also assume two characteristics of prices:
• Prices are fixed—no negotiation
• We can buy as much as we want of something without driving
the price up (because of an increase in demand)
The Buyer’s Problem
How much money do you have?
• There are lots of things to do with your money, but we
assume:
• There is no saving or borrowing, only buying
• That even though we use a straight line to represent purchase
choices, we only purchase whole units
The Buyer’s Problem
How much money do you have?
• There are lots of things to do with your money, but we
assume:
• There is no saving or borrowing, only buying
• That even though we use a straight line to represent purchase
choices, we only purchase whole units
Example
• Suppose you have $40 at your disposal. The only two goods you can
purchase are pizza and soda.
• The price of pizza is $8/unit and the price of soda is $4/unit.
• Suppose your preference of pizza and soda is given in the following
table. We are showing the utility you can get from pizza and soda.
Example
Pizza Soda
# MU TU # MU TU
0 - 0 0 - 0
1 50 50 1 75 75
2 40 90 2 48 123
3 32 122 3 36 159
4 28 150 4 24 183
5 26 176 5 22 205
6 24 200 6 20 225
7 22 222 7 13 238
8 20 242 8 10 248
9 17 259 9 7 255
10 16 275 10 5 260
Example
Example
• The graph above shows your budget constraint. Because you only
have $40 as your budget, given the prices (pizza: $8, soda: $4), you
can buy 5 pizza, or 10 soda, or any combination in between, such as
1 pizza and 8 soda, or 4 pizza and 2 soda, etc.
• If we connect all those combinations that use up all $40, we get a
downward slope line, which is our budget constraint.
• Any combination above the budget constraint is not feasible, for
example, you cannot buy 4 pizza and 6 soda, that is going to cost
you 4*8+6*4=$56, which exceeds your budget.
Example
• On the other hand, in order to maximize your total utility, you do
not want to purchase any combination below the budget
constraint, such as 2 pizza and 2 soda.
• This is because given the utility table, you always get positive utility
from anything you purchase. So you want to spend every dollar you
have, otherwise you are not optimizing.
• Therefore, the combination that offers the highest total utility must
be on the budget constraint line.
Example
• To make things simpler, given the above discussion, let’s rearrange
the utility table and only show the combinations that are on the
budget constraint line.
# pizza # soda TU pizza TU soda TU
0 10 0 260 260
1 8 50 248 298
2 6 90 225 315
3 4 122 183 305
4 2 150 123 273
5 0 176 0 176
Example
• It is now quite easy to see that in order to get the highest utility, you
should purchase 2 pizza and 6 soda using your $40.
• Note that in your textbook, the jean and sweater example uses
“benefit” as a measure of satisfaction. It is exactly the same as the
utility we use here. Your textbook calls that “benefit” because it
does not include a utility chapter.
Example
• Now let’s suppose in a second scenario, the price of pizza drops to
$4 from $8. The price of soda remains the same.
• Then you can purchase up to 10 pizza instead of 5 using $40.
• On the budget graph, we can see that the budget constraint line
rotates out, as shown below.
Example
Example
• Again, we can arrange the utility tables to show all combinations.
We used total utility last time, lets try using marginal utility this
time. You can try use total utility yourself, it should give you the
same result.
# pizza # soda MU pizza MU soda
2 8 40 10
3 7 32 13
4 6 28 20
5 5 26 22
6 4 24 24
7 3 22 36
Example
• In the above combinations, if the MU of pizza is greater than the
MU of soda, then it makes sense to consume more pizza.
• On the other hand, if the MU of soda is greater, then one should buy
more soda to optimize.
• Total utility is maximized when the MU of pizza equals the MU of
soda.
Example
• The third scenario: now the price of pizza stays at its original price
$8. The price of soda increases to $8.
• Now you can purchase up to 5 soda instead of 10 using $40.
• On the budget graph, we can see that the budget constraint line
rotates inward, as shown below.
Example
Example
• We still arrange the utility tables to show all combinations. And we
still want to use marginal utility to figure out the best option.
However, this time, we do not have a point where the marginal
utility of the two items are the same.
# pizza # soda MU pizza MU soda
0 5 - 22
1 4 50 24
2 3 40 36
3 2 32 48
4 1 28 75
5 0 26 -
Example
• We focus on where the marginal utility is the closest, and analyze
what is the best option.
• As shown below, if we move from 2 pizza to 3 pizza, we get the 3rd
pizza and have to give up the 3rd soda. This change results in a net
change in utility of +32 (3rd pizza) – 36(3rd soda) = -4
• So our best option should be buying 2 pizza and 3 soda.
# pizza # soda MU pizza MU soda
2 3 40 36
3 2 32 48
Example
• In our 4th scenario, we rest the price back to $8 for pizza and $4 for
soda. This time, we increase the budget from $40 to $56.
• Now we can purchase a maximum of 7 pizza, or 14 soda. The budget
constraint line shifts out, as shown below.
Example
Example
• With the change in the budget, we arrange the utility table to show
the new combinations on the budget constraint line.
• Note that when we buy one more pizza, we have to give up 2 units
of soda given their prices. So here, the marginal utility of soda is the
change in TU after consumer 2 more units of soda.
# pizza # soda MU pizza MU soda TU soda
2 10 40 12 260
3 8 32 23 248
4 6 28 42 225
5 4 26 60 183
6 2 24 123 123
7 0 22 - 0
Example
• Using the same method in scenario 3, we can figure out the best
option is to buy 4 pizza and 6 soda.
# pizza # soda MU pizza MU soda
3 8 32 23
4 6 28 42
5 4 26 60
Example
• We summarize our analysis of the buyer’s problems in the table
below.
Optimal choice
P - pizza P - soda Budget Q - pizza Q - soda
Scenario 1 $8 $4 $40 2 6
Scenario 2 $4 $4 $40 6 4
Scenario 3 $8 $8 $40 2 3
Scenario 4 $8 $4 $56 4 6
Demand curve
• Time to plot the demand curve of this consumer using the above
results. We analyze the market of soda and we start with scenario 1
and 3.
• This utility maximizing consumer purchases 3 soda at the price of
$8, 6 soda at the price of $4. In both scenarios, he has a budget of
$40 and the price of pizza is $8.
• This gives us a downward slope demand curve in the following
graph.
Demand curve
Demand curve
• Now we add scenario 2 into the above graph. In scenario 2, the
budget is still $40 but now the price of pizza is only $4.
• We see that though the price of soda is $4 in both scenario 1 and 2,
the consumer would purchase less soda when the price of pizza
goes down.
• The consumer now buys 4 soda instead of 6 at the same price, the
demand curve shift to the left as the price of pizza decreases.
Demand curve
Demand curve
• Next, we look at the effect of the change in budget. This time, we
look at the market for pizza. Using scenario 1 and 2, we can plot the
demand curve of pizza, our consumer buys 2 pizza at the price of $8
and 6 pizza at the price of $4 holding the budget and soda price
constant.
• As the budget increases to $56, the consumer now buys 4 pizza
instead of 2 at the price of $8. The demand curve shift to the right
as a result of the change in wealth (budget).
Demand curve
Required reading
• Microeconomics (2nd Edition) by Daron Acemoglu, David Laibson, and John
List, Chapter 5.1 – 5.3
