CONSUMER CHOICE
THEORY
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The concept of consumer choice theory, opportunity cost, cost-benefit analysis, and utility analysis. It also discusses the characteristics of indifference curves, budget constraints, and budget lines. examples to explain the concepts and their applications.
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2021/2022
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CONSUMER CHOICE
THEORY
CONSUMER
Is an individual or a household composed of one
or more individuals.
Is the basic economic unit that determines which
commodities are purchased and in what
quantities
UNLIMITED WANTS CONSUMERS
VS.
CONSTRAINTS MAXIMIZE SATISFACTION
CHOICES
INDIVIDUAL TRADE
OFFS
Example: Spending
more time on
homework studying
Trade Off – Not
watching T.V., Talking
to friends, playing
sports etc.
BUSINESS
TRADE OFF
A CEO decides to lay off workers to save money. The desire to make more money is driving the decision. What is the trade off?
OPPORTUNITY COST
Another name for relative price
Is the price of one good in terms of another good
Foregone value of the next best alternative in a
given action
Varies from person to person
COST-BENEFIT ANALYSIS
Decision-making process in which you compare
what you will sacrifice and gain by a specific action
MARGINAL COST – extra cost of adding one unit
MARGINAL BENEFIT – extra benefit of adding
one unit
MARGINAL COST & MARGINAL BENEFIT
FORMULA:
MC = CHANGE IN TOTAL COST/CHANGE
IN QUANTITY
MB = CHANGE IN TOTAL BENEFIT /
CHANGE IN QUANTITY
DECISION
MB = MC : Efficient and productive MB > MC : Continue Consuming MB < MC : Not Consume
Toy Empire now needs to determine its marginal benefits.
They begin this process by holding focus groups with
consumers in their target markets to understand their
average purchase price points. The company can then use this
primary research to estimate their average marginal benefit,
which in this case is P15.
WHAT IS THE NET BENEFIT?
ANSWER: P9.00 per unit
MARGINAL COST
Quantity Total Cost Marginal Cost 0
1
2
3
4
5
NET MARGINAL BENEFIT/ (COST)
Quantity Total Revenue Total Cost Profit/ Loss MB MC Net Marginal Benefit/ Cost DECISION 1 35 30 5 35 30 5 Continue 2 45 40 5 10 10 0 Efficient 3 57 49 8 12 9 3 Continue 4 67 67 0 10 18 -8 Not continue 5 72 77 -5 5 10 -5 Not continue