BME Pre Finals Reviewer

BME Pre Finals Reviewer
Consumer Behavior
Basic Principles of Consumer Preference
 Limited income prompts consumer choice – A consumer considers his/her limited income in purchasing goods and
services.
 Consumer choice is decided on purpose – A consumer often selects the product which gives the higher benefit if
he/she chooses between two (2) products of the same cost.
 There are alternative products – A consumer buys goods to satisfy his/her want or need. There are many alternatives
to satisfy consumers’ wants and needs.
 Consumers make choices based on past experiences and knowledge, not necessarily on complete information – A
consumer would exert his/ her effort and time on researching the information of the goods depending on how much
he/she values the goods
 The law of diminishing marginal utility applies to consumer preferences – A consumers’ behavior in purchasing
goods and availing services applies to the law of diminishing marginal utility.
Utility – is defined as the subjective personal advantage or fulfillment from obtaining goods.
Marginal Utility – is derived from the consumption of an additional unit of a good.
Utility and Demand
Theory of Utility – it states that if all else is equal, a rational consumer will prefer the option that brings the highest utility. The
utility is measurable in utils.
The ways to measure utility are as follows:

o Ordinal Utility – ranks the order of satisfaction or benefits of the options available for the consumers
o Cardinal Utility (Measurable Utility) – this does not only rank the consumers’ options but also shows the differences
in the magnitude of consumer preference with one option over another.
Law of Diminishing Marginal Utility – The marginal utility (satisfaction) obtained from consuming a particular good decrease
as the number of consumption increases, which show an inverse relationship.
Law of Demand – Price also decreases as the consumptions (quantity demanded) increases.
Prices and Consumer Choices – Prices directly affect consumer choice.
Substitution Effect
- effect caused by a change in the price of a product leads the consumer to replace the product with alternative goods at lower
prices
- price-dependent
- if the price of a product increases, the consumers tend to find an alternative product, assuming that income is constant
Income Effect
- the effect on the demand for a product due to change in the real income of consumers caused by the price movement of the
product.
- income-dependent
- if the price of a product increases, it automatically decreases disposable income.
Price Elasticity
Concept of Price Elasticity
Elasticity – measures the responsiveness of one (1) variable when other variable changes
Price Elasticity – specifically measures the responsiveness of demand and supply to price changes.
Price Elasticity of Demand

- in general, when the price of a product increases, its demand decreases while the supply increases.
- responses can be quantitatively large or small depending on how valuable the product is to the buyers, how many options are
offered, and how much time is still available to adjust choices.
- important to determine the elasticity of demand as this is one of the tools the sellers use to strategize their product pricing.
Determinants of Price Elasticity of Demand
 Availability of alternative goods or services – if there are many available options or alternatives, price elasticity tends
to be more elastic.
 Share in the total income to be spent on the good or services – if a product or service would take up a large portion
of a consumer’s budget, s/he would most probably think twice about purchasing the said product or service in case its
price increases.
 Time dimension to responsiveness – if a consumer given only a short time to decide on his/her options, the demand
will most likely be inelastic since s/he might just stick to the original product or service s/he is looking for despite the
price increase.
 The necessity of products or services – the demand will be inelastic despite price changes if the product or service is
a basic necessity.
Price Elasticity of Supply

- the gauges of the responsiveness of producers to price changes
- is computed similarly to the demand
Determinants of Price Elasticity of Supply

 Availability of resources – if the resources or alternatives needed to produce goods can be easily obtained, the supply
tens to be elastic.
 Other uses of inputs – producers may have other options on what to manufacture using their resources.
 Required time on producing additional units – the supply of seasonal crops is considered inelastic since producing
more of them would take time.
Income Elasticity of Demand – as discussed in the law of demand, products can be classified as normal and inferior goods.
Normal goods – are goods whose demand increases as consumers’ income increases.
Inferior goods – goods whose demand decreases when the income of consumers increases.
Macroeconomics – economies experience short-term performance ups and downs istead of steady growth rate.
Business cycle – referring to ups and downs
Aggregate output – the primary measure of economic performance
Expansion or a boom – the period from a trough(or bottom of the cycle)
Contraction, Recession, or Slump – the period from a peak to a trough when output and employment fall.
Depression – a prolonged and deep recession.
Inflation and Deflation
Inflation – is an increase in the overall price level

Hyperinflations – a periods of rapid increases in the overall price level
Deflation – a decrease in the overall price level
The Circular Flow Diagram – a useful way of seeing the economic interactions among the four (4) groups in the economy
Economy participants are divided into four (4) broad groups:

1. households
2. firms
3. the government
4. the rest of the world
Transfer Payments – it is an economist call these payments from the government (for which the recipients do not supply
goods, services, or labor).
The Three (3) Market Arenas

 Goods-and-Services Market – households and the government purchase goods and services from firms in the goods-
and-services market.
 Labor Market – interaction in the labor market takes place when firms and the government purchase labor from
households.
 Money (Financial) Market – in the money market (called the financial market), households purchase stocks and
bonds from firms.
a. Treasury bonds, notes, or bills – promissory notes are issued by the government when it borrows money in
exchange for money.
b. Corporate bonds – promissory notes are issued by corporations when they borrow money.
c. Shares of stock – financial instruments give the holder a share in the firms’ ownership and the right to share in
the firm’s profits
d. Dividend – the portion of a firm’s profits it pays out each period to its shareholders.
The Role of the Government in the Macroeconomy
 Fiscal Policy
- it refers to the government’s decisions about how much to tax and spend.
- government collects taxes from households and firms and spends those funds on goods and services.
 Monetary Policy
- it is a policy framework of the Philippines deals with inflation targeting to focus mainly on price stability.

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BME Pre Finals Reviewer

Basic Principles of Consumer Preference

Utility and Demand

The ways to measure utility are as follows:

Prices and Consumer Choices – Prices directly affect consumer choice.

Concept of Price Elasticity

Price Elasticity of Demand

Price Elasticity of Supply

Determinants of Price Elasticity of Supply

Inflation and Deflation

Inflation – is an increase in the overall price level

Economy participants are divided into four (4) broad groups:

The Three (3) Market Arenas

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