Consumer Behavior Theory

Note: The original VNote structure and wording are preserved. Only clear errors or changed definitions are corrected minimally.

1. Utility

1.1. What It Is

• Utility is the degree to which a desire is satisfied and is subjective.
• It has both common and individual characteristics.

1.2. Types of Utility

• Total utility
• Marginal utility

1.2.1. Marginal Utility

• Diminishing marginal utility.

2. The Consumer’s Best Decision

2.1. Why Consumption Decisions Are Needed

• Income is limited.
• Time is limited.
• Goods are limited.
• Prices change.

2.2. How Consumers Make the Best Decision

• Spend limited income where it creates the greatest utility in the note’s framework.

3. Consumer Surplus

3.1. What It Is

• Consumer surplus = willingness to pay - actual payment.

3.2. Uses

• Government price control.
• Market analysis.

4. Tools

4.1. Indifference Curves

4.1.1. What an Indifference Curve Is

4.1.1.1. Consumer Preferences

• Completeness
• Transitivity
• Nonsatiation

4.1.1.2. Indifference Curve

• Combinations of two goods that provide the same satisfaction.

4.1.2. Characteristics of Indifference Curves

• Higher curves represent higher utility in the standard model.
• Curves do not intersect.
• Convex to the origin.

4.1.3. Special Cases

• Perfect substitutes
• Complements

4.2. Budget Constraint

4.2.1. What It Is

• With income fixed, the maximum affordable combinations of two goods.

4.2.2. Factors Affecting the Budget Line

• Income and prices.

4.2.3. Marginal Rate of Substitution

• Measures substitution between goods.

5. Consumer Equilibrium

5.1. What It Is

• The affordable bundle that maximizes utility in the model.

5.2. Changes in Consumer Equilibrium

• Price changes
• Income changes

6. Income Effect and Substitution Effect

• Total effect = income effect + substitution effect.