1.2.1 Consumer behaviour
If a music store was to offer you the latest vinyl
albums at £5 each how many would you buy?
If the price rose to £15 per album would this change
your behaviour?
Why is that?
AQA 1.2: I NDIVIDUAL E CONOMIC D ECISION
M AKING
1.2.1 W HAT
1.1.1 – 1.1.5 were
covered in Y1
YOU NEED TO KNOW

Rational economic decision making and economic
incentives

Utility theory: total and marginal utility, and the
hypothesis of diminishing marginal utility

Utility maximisation

The importance of the margin when making choices

Students should appreciate that the hypothesis of
diminishing marginal utility supports a downward sloping
demand curve but they are not expected to understand
the principle of equi-marginal utility or to use this
principle to explain why there is likely to be an inverse
relationship between price and quantity demanded
R ATIONAL
Rational
choice
theory.
ECONOMIC DECISION MAKING

Maximisation occurs when an economic agent
tries to obtain the most that they can from the
economic activity that they undertake

This will differ dependent on the economic
agent:
 Households or consumers wish to maximise
their utility or personal satisfaction
 Firms wish to maximise their profits
 Government wish to maximise the welfare of
the population
B EHAVING
Economic
objectives are the
use of resources in
order to meet the
goals of an
economic agent
over a period of
time.
RATIONALLY
-
ECONOMIC OBJECTIVES

Economic agents have a variety of economic objectives

They meet these objectives by making use of the factors
of production available to them

Land, Labour, Capital and Enterprise

These factors of production are turned into products that
will allow the economic agent to meet their targets

Economic agents include:

Households

Firms

Government
What are the economic
objectives of these American
professionals?
B EHAVING
Private benefits are
those benefits that
accrue to an
individual or firm
through economic
activity.
-
HOUSEHOLDS
The economic objectives of households might include:

The maximisation of private benefit from consumption

Can there be
hidden
benefits of
consumption?
RATIONALLY

Individuals will seek to attain the highest level of
satisfaction available in their consumption of goods
and services
The maximisation of private benefit from working

Individuals will seek to attain the highest benefit
available in the supply of their labour

This might include higher pay or better working
conditions
B EHAVING
Do you
maximise the
time spent on
your studies or
are you satisfied
with a certain
level of work?
RATIONALLY
-
FIRMS

Profit maximisation

Firms will seek to attain the highest level of profit available in
their production of goods and services

Profit satisficing

A level of profit below profit maximisation that satisfies the needs
of the owners or managers of an organisation e.g. working less
hours to enjoy more leisure time or behaving ethically

Sales maximisation


Some firms will seek to maximise sales, possibly to gain market
share
Growth

Some firms seek to maximise their growth potential e.g. through
the takeover of other firms
R ATIONAL
1
BEHAVIOUR
10
In pairs write on to sticky notes a range of decisions you make on a regular or semi regular
basis e.g. buying shoes, choosing where to go at a weekend, buying lunch, buying
sportswear etc.
Place each sticky note on a spectrum as shown above. 1 is 100% irrational and 10 is 100%
rational.
What are the factors influencing whether your behaviour is rational?
If you asked a friend to place the sticky notes on the spectrum on your behalf would they
agree with your assessment of your own behaviour?
U TILITY THEORY
Does appearance
affect satisfaction?
Should this be
reflected in price?

Utility theory is concerned with the satisfaction
that an individual derives from consuming a good
or service

The unit of measurement for utility is called utils

Total utility is the aggregate amount of
satisfaction an individual derives from consuming
a good or service

Marginal utility is the amount of satisfaction an
individual derives from consuming one extra unit
of a good or service
TOTAL UTILITY
How much
satisfaction do
you get from
your first cup of
tea or drink in
the morning?
Is this the same
for your second?

Total utility diminishes or decreases over
time

As individuals increase consumption of a
good or service the amount of satisfaction, or
utils, that they receive from this
consumption will decline

This occurs as an individual becomes more
satiated, or satisfied, with the product
TOTAL UTILITY
Total utility
can be
illustrated in a
table.
Have you ever
over indulged
or consumed a
product
without really
wanting it?

A consumer gains 10 utils of satisfaction from consuming 1 chocolate bar

The satisfaction, or utility, gained from the second chocolate bar is less than the
first, but total utility increases to 18

At some point, e.g. the 4th bar, there is no additional satisfaction

After this point utility starts to fall and there is dissatisfaction from consuming an
extra unit

Presumably the individual would not consume this final unit. However, there is
evidence that this happens in the real world
Chocolate bars
Total Utility (Utils)
0
0
1
10
2
18
3
22
4
22
5
16
TOTAL UTILITY

Total utility can be illustrated graphically

As consumption increases, total utility rises at first and
then starts to diminish
Total utility
No.
of
bars
25
20
15
Utils
10
5
0
0
1
2
3
4
5
M ARGINAL UTILITY

Marginal utility is shown by the formula:
Change in total utility
Change in number of units consumed

Marginal utility can be shown on a table
Chocolate bars
Total Utility (Utils)
Marginal utility (Utils)
0
0
1
10
10
2
18
8
3
22
4
4
22
0
5
16
-6
D IMINISHING MARGINAL UTILITY

Marginal utility can be illustrated graphically

As consumption increases, marginal utility diminishes giving
us diminishing marginal utility
Total utility
12
No. 10
of
8
bars 6
4
2
Utils
0
-2
-4
-6
-8
0
1
2
3
4
5
D IMINISHING
MARGINAL UTILITY
AND THE DEMAND CURVE

If increased consumption of a good or service provides fewer
and fewer amounts of marginal utility, then at some point,
consumers will only buy additional units if its price falls

Therefore, we can equate diminishing marginal utility to the
demand curve. As price falls, consumers gain greater
satisfaction from demanding the good

This means that as price falls, demand increases

As price increases, demand falls
Draw and label a
demand curve to
illustrate this slide.
M ARGINAL
UTILITY AND
OPPORTUNITY COST

Opportunity cost can be used to look at utility

If an individual gains greater marginal utility from
product A than product B this will be reflected in the
opportunity cost and they will choose an extra unit of
product A rather than product B

This suggests that they prefer product A as the benefit
foregone of the next best alternative i.e. product B is
lesser
U TILITY MAXIMISATION
In the real world 
utility
maximisation

will involve the
marginal utilities
of all products,
not just A and B.

Utility maximisation occurs where the last £ a consumer spends
on each product yields the same amount of marginal utility
If the last unit bought of product A provides more marginal
utility than product B than the consumer will continue to
purchase more of product A until the last unit purchased has the
same marginal utility as product B
Given that individuals have budget constraints utility will be
maximised where:
𝑀𝑈𝑥
𝑃𝑥

=
𝑀𝑈𝑦
𝑃𝑦
For example, for utility maximisation to occur for an individual,
the MU of chocolate bars divided by the price of chocolate bars
must equal the MU of soft drinks divided by the price of soft
drinks
U TILITY MAXIMISATION
In the table,
chocolate bars
are £1 and soft
drinks £2. The
individual will
look to maximise
utility.
This occurs
where:
𝑀𝑈𝑥
𝑃𝑥
=
𝑀𝑈𝑦
𝑃𝑦
Here, marginal
utility is equal
for each
product.
Chocolate
bars (£1)
TU
(Utils)
Soft
drinks (£2)
TU
(Utils)
0
0
0
0
1
7
7
7
1
2
13
6
6
3
18
5
4
22
5
20
MU
(Utils)
MU/P
MU
(Utils)
MU/P
16
16
8
2
26
10
5
5
3
34
8
4
4
4
4
36
2
1
-2
-2
5
32
-4
-1
Utility is maximised when an individual spends all of their budget. If
they didn’t, they can gain greater utility by spending more.
We can see that the individual would buy 1 soft drink rather than 1
chocolate bar because 8 utils is greater than 7 utils (Under MU/P).
They would then buy an extra 2 chocolate bars before they purchase
any extra drinks. However, they get the same satisfaction from the 3rd
chocolate bar as they do from the 2nd soft drink.
U TILITY MAXIMISATION
Given a budget
of £10 what
combination of
chocolate bars
and soft drinks
would an
individual
purchase in
order to
maximise utility?
This occurs
where:
𝑀𝑈𝑥
𝑃𝑥
=
𝑀𝑈𝑦
𝑃𝑦
Chocolate
bars (£1)
TU
(Utils)
Soft
drinks (£2)
TU
(Utils)
0
0
0
0
1
7
7
7
1
2
13
6
6
3
18
5
4
22
5
20
MU
(Utils)
MU/P
MU
(Utils)
MU/P
16
16
8
2
26
10
5
5
3
34
8
4
4
4
4
36
2
1
-2
-2
5
32
-4
-2
We can work out individual combinations (consumption bundles)
but the utility maximising combination occurs where £4 would have
been spent on 4 chocolate bars and £6 spent on 3 soft drinks. At this
point the total budget of £10 is spent and total utility is 56.
To equalise the utility we can use the formula:
𝑀𝑈𝑥 𝑀𝑈𝑦
4
8
=
or
=
𝑃𝑥
𝑃𝑦
£1 £2
T HE
IMPORTANCE OF THE MARGIN
WHEN MAKING CHOICES

The margin is fundamental when individuals make choices

Individuals will only choose an option if the marginal benefit
is greater than the marginal cost

This will improve their total utility

If the marginal cost is greater than the marginal benefit then
total utility will actually fall

In this instance the individual would experience
dissatisfaction from consuming the extra unit

The individual will consume up to the point where marginal
benefit equals marginal cost
10 MINUTES TEST YOURSELF
1. What is meant by total utility?
2. What is meant by marginal utility?
3. What is the relationship between marginal utility and the demand curve?
4. Explain the importance of the margin when making decisions.
End