Econ 12
Unit 2 Β· Consumer Behaviour & Decision-Making
BC Economics 12

Unit 2: Consumer Behaviour
and Decision-Making

Why do we buy what we buy? In this unit, you will explore utility, elasticity, and how consumers make decisions with limited budgets.

Section 1

What is Utility?

In economics, "utility" means satisfaction. It explains why we buy what we buy.

Key Vocabulary β€” click any word to see its definition
Utility Utils Total Utility Marginal Utility Rational Consumer Budget Constraint
Utility is the satisfaction or enjoyment a person gets from using a good or service. It is personal β€” the same product can give different satisfaction to different people. Example: A hot coffee gives high utility to someone who loves coffee, but low utility to someone who does not.
Utils are imaginary units that economists use to measure utility. They are not real β€” they are just a way to compare satisfaction levels. Example: "The first slice of pizza gave me 80 utils."
Total Utility (TU) is the total satisfaction a person gets from consuming all units of a good. It usually goes up as you consume more β€” but it rises more slowly each time.
Marginal Utility (MU) is the extra satisfaction from consuming one more unit. MU = change in TU Γ· change in quantity. In most decisions, it is the last unit that matters most.
Rational Consumer β€” economists assume that people try to get the most satisfaction they can from their money. They compare what they gain (satisfaction) with what they pay (price).
Budget Constraint is the limit on what a consumer can buy. It is set by their income and the prices of goods. You cannot spend more money than you have.

When you choose to buy a coffee instead of a juice, you are making an economic decision. You chose the option that gave you more utility β€” more satisfaction β€” for your money. Economics studies this kind of decision carefully.

Why utility matters

Utility helps us answer three questions: Why do people buy certain things? How much are they willing to pay? And when do they stop buying?

If you understand utility, you can explain most consumer behaviour.

The rational consumer

Economists assume that consumers are rational. This means they compare the satisfaction they expect to get (utility) with the price they must pay. When the utility is worth the price, they buy. When it is not, they do not.

How do we measure utility?

Utility is personal and cannot be measured exactly. But economists use imaginary units called utils to compare satisfaction levels. The number itself is not important β€” what matters is whether utility is going up or down as you consume more.

Real-world example: You are very hungry and you eat your first burger. You feel great β€” high utility. The second burger is still good. By the third burger, you feel too full. Your utility from burgers peaked at the second one and then fell.
πŸ’‘ Did You Know?

In the 1700s, a philosopher named Jeremy Bentham believed that happiness could be measured like a number. He wanted to calculate the "total happiness" of a decision. This was an early version of the utility idea in economics.

πŸ”‘ Key Idea

Utility is about the last unit. Your decision to buy "one more" depends on how much satisfaction that extra unit gives you β€” not how much you enjoyed the first one.

πŸ“ Knowledge Check
1. What does "utility" mean in economics?
2. What are "utils"?
3. A "rational consumer" in economics is someone who:
Section 2

Marginal Utility & the Law of Diminishing Marginal Utility

Each extra unit gives you a little less satisfaction than the one before.

Key Vocabulary
Law of DMU Diminishing Disutility MU Formula
Law of Diminishing Marginal Utility β€” as you consume more units of a good, the extra satisfaction (MU) from each unit decreases. This law applies to almost everything we consume.
Diminishing means getting smaller over time. In this context, your satisfaction from each extra unit becomes smaller and smaller, even though it is still positive.
Disutility β€” when consuming more of something actually makes you feel worse. Total utility begins to fall. Example: eating a 9th slice of pizza when you are already very full.
MU = Ξ”TU Γ· Ξ”Q
Marginal Utility = the change in Total Utility divided by the change in quantity. Since we usually look at one extra unit (Ξ”Q = 1), MU simply tells us how much TU changes after one more unit.

The Law of Diminishing Marginal Utility is one of the most important ideas in this unit. It says that as you consume more of any good, each extra unit gives you less satisfaction than the one before.

MU = Ξ”TU Γ· Ξ”Q
Marginal Utility = the change in Total Utility when one more unit is consumed.
Because Ξ”Q = 1 in most examples: MU = TU after βˆ’ TU before

Why does this happen?

Your most urgent need is satisfied first. Think about a very hot day. The first glass of cold water is incredibly satisfying. The second is good. By the fifth glass, you probably do not want any more. Your need for water was satisfied after the first few glasses.

When does a consumer stop buying?

A rational consumer keeps buying a good as long as the extra satisfaction (MU) is worth the price. When the MU falls below the price, they stop buying. This is why people do not buy an unlimited amount of things they enjoy β€” at some point, one more unit is just not worth the money.

Example: You pay for a monthly movie streaming service. The first film you watch feels very worthwhile. By your 15th film of the month, you are only half-watching it. The satisfaction from "one more film" has become very low, even though the price (your monthly subscription) has not changed.
🌏 Real World

The Law of DMU explains why all-you-can-eat buffets make money. Restaurants know that after the first few plates, customers' satisfaction from extra food drops so much that they do not eat very much more than a normal meal.

πŸ”‘ Two Curves

Total Utility goes up, but more and more slowly. It may eventually fall.

Marginal Utility always falls β€” it starts high and gets lower with each unit.

πŸ“ Knowledge Check
1. The Law of Diminishing Marginal Utility states that as you consume more of a good:
2. Using the formula MU = Ξ”TU Γ· Ξ”Q: if Total Utility rises from 100 to 120 after one extra unit, what is the Marginal Utility?
3. A consumer experiences "disutility" when:
Interactive Activity

πŸ• The Pizza Lab

Move the slider to "eat" slices of pizza. Watch Total Utility and Marginal Utility change in real time.

Marginal Utility of Pizza Slices
Move the slider left and right to choose how many slices you eat. The table and charts update automatically.
Slices eaten: 0 slices
Total Utility 0 utils
Marginal Utility β€” utils / slice
Status β€”
Total Utility β€” rises, then falls
Marginal Utility β€” always falling
Slices (Q) Total Utility (TU) Marginal Utility (MU) Assessment
πŸ“ Knowledge Check
1. Looking at the pizza data, at which slice does Total Utility reach its highest point?
2. When Marginal Utility becomes negative (e.g., at slice 7), what happens to Total Utility?
3. The pizza data shows the Law of Diminishing Marginal Utility because:
Section 4

Consumer Choice

How do consumers decide where to spend their money?

Key Vocabulary
Consumer Choice Value for Money Consumer Surplus
Consumer Choice β€” the decision a consumer makes about which goods to buy, how many to buy, and in what combination. Rational consumers try to get the most satisfaction from their available money.
Value for Money β€” in economics, this means getting the most utility (satisfaction) per dollar spent. Consumers naturally prefer options that give them more satisfaction for the same price.
Consumer Surplus β€” the difference between what a consumer was willing to pay and what they actually paid. It represents the extra benefit the consumer received. Example: You were willing to pay $20 for a book. It was on sale for $12. Your consumer surplus = $8.

When you have a limited amount of money, you must choose how to spend it. A rational consumer tries to get the most satisfaction (utility) possible from their budget.

The basic idea

Consumers compare the satisfaction they get from different goods. If one item gives more satisfaction per dollar, they will prefer to buy that item first. As they buy more of it, the marginal utility falls (remember the Law of DMU). Eventually, the satisfaction per dollar from different goods becomes similar, and the consumer feels happy with their choices.

Example: You have $5. Pizza slices cost $2 and drinks cost $1. You are very thirsty and a little hungry. Your first drink gives you much more satisfaction per dollar than a pizza slice. So you buy a drink first. After the drink, the next best choice might be a pizza slice. You keep buying in the order that gives you the most satisfaction per dollar.

Consumer Surplus

Sometimes, the price you pay for something is lower than the maximum amount you would have been willing to pay. This gap is called consumer surplus. It is a real benefit that you receive as a buyer.

Example: You would pay up to $50 for a concert ticket. You buy one for $35. Your consumer surplus is $15. You feel like you got a good deal.
πŸ›’ Shopping Behaviour

When you choose a larger pack of something because it costs less per unit, you are already thinking about value for money β€” which is exactly how economists model consumer decision-making.

πŸ”‘ Key Idea

A rational consumer always asks: "Which option gives me the most satisfaction for my money right now?" As they buy more, diminishing MU changes the answer.

πŸš€ Going Further The Formal Rule: Consumer Equilibrium Not required for the unit test β–Ά

Economists have a precise rule for when a consumer has made the best possible choices with their budget. It is called consumer equilibrium. At this point, the consumer cannot improve their total satisfaction by shifting money from one good to another.

The rule uses the idea of MU per dollar β€” how much satisfaction you get for each dollar you spend on a good. You calculate it by dividing the MU of a good by its price.

MU_A / P_A = MU_B / P_B
When the MU per dollar is equal for all goods you buy, you have maximised your total utility. If one ratio is higher than another, you should buy more of that good and less of the other.

This is called the Equimarginal Principle. It is a central idea in university-level microeconomics. Understanding the basic concept β€” that consumers compare satisfaction per dollar β€” is what matters at this stage.

πŸ“ Knowledge Check
1. A consumer has $10. Snacks give MU per dollar = 8; drinks give MU per dollar = 4. To maximise utility, where should they spend their next dollar?
2. You were willing to pay $30 for a book but you find it on sale for $20. What is your consumer surplus?
3. Why do rational consumers typically buy a mix of goods rather than spending all their money on just one item?
Section 5

Price Elasticity of Demand

When prices go up, how much does consumer behaviour actually change?

Key Vocabulary
Price Elasticity Elastic Demand Inelastic Demand Unit Elastic Perfectly Inelastic Determinants
Price Elasticity of Demand (PED) measures how much the quantity demanded of a good changes when its price changes. PED = % change in Qty Demanded Γ· % change in Price. We use the absolute value (ignore the negative sign).
Elastic Demand β€” |PED| > 1. Consumers are very sensitive to price changes. A small price increase causes a large drop in quantity demanded. Common for luxury goods, goods with many alternatives, or non-essential items.
Inelastic Demand β€” |PED| < 1. Consumers are not very sensitive to price changes. A price increase causes only a small drop in quantity demanded. Common for necessities, addictive goods, or goods with few alternatives.
Unit Elastic β€” |PED| = 1 exactly. A 1% price increase causes exactly a 1% decrease in quantity demanded. Total revenue does not change.
Perfectly Inelastic β€” |PED| = 0. The quantity demanded does not change at all, no matter how much the price changes. The demand curve is a vertical line. Example: life-saving medicine with no alternative.
What makes demand elastic or inelastic?
β†’ Number of alternatives (more alternatives = more elastic)
β†’ Necessity vs. luxury (necessities = inelastic)
β†’ How much of your income you spend on it (bigger share = more elastic)
β†’ Time (more time = more elastic β€” consumers find alternatives)

Not all goods react to price changes in the same way. When fuel prices rise by 20%, most people still fill up their cars β€” they have no choice. When the price of designer bags rises by 20%, sales may drop a lot. This difference is called price elasticity of demand.

PED = % Ξ”Qd Γ· % Ξ”P
The result is usually negative (price up β†’ quantity down). We use the absolute value.
|PED| > 1 β†’ Elastic  |  |PED| < 1 β†’ Inelastic  |  |PED| = 1 β†’ Unit elastic

Why does elasticity matter?

For businesses: if demand is inelastic, raising the price increases total revenue β€” consumers keep buying. If demand is elastic, raising the price decreases total revenue β€” consumers stop buying.

For governments: taxing inelastic goods (such as cigarettes or fuel) raises a reliable amount of money. Taxing elastic goods raises less money, because buyers stop purchasing when the price rises.

The Total Revenue Test

This is a simple way to identify elasticity. If the price rises and total revenue also rises, demand is inelastic. If the price rises and total revenue falls, demand is elastic.

BC Example: The BC government adds a carbon tax to fuel. Because demand for fuel is relatively inelastic in the short term (people still need to drive), the tax raises significant revenue. Over a longer period, demand becomes more elastic as people buy electric cars or use public transport.
πŸ“Š Real Data

Research shows that the price elasticity of demand for cigarettes is about βˆ’0.4 (inelastic). A 10% price increase reduces smoking by only about 4%. This is why governments tax cigarettes β€” it raises money, even if it does not stop people from smoking.

πŸ”‘ Revenue Rule

Elastic: Price ↑ β†’ Revenue ↓
Inelastic: Price ↑ β†’ Revenue ↑
Unit elastic: Price ↑ β†’ Revenue unchanged

πŸ“ Knowledge Check
1. A 5% rise in price causes a 15% fall in quantity demanded. What is the PED, and what type is it?
2. A cinema raises ticket prices and total revenue falls. This tells us that demand for cinema tickets is:
3. Which of the following would make demand for a good MORE elastic?
Interactive Activity

πŸ“‰ Elasticity Explorer

Adjust the price and see how demand and total revenue change for elastic and inelastic goods.

Price Elasticity Visualizer
First choose a demand type, then move the price slider. Watch how quantity demanded and total revenue respond.
Choose demand type:
Price ($): $10
Price$10
Qty Demanded100
Total Revenue$1,000
Verdictβ€”
The steeper the demand curve, the more inelastic the demand. The shaded area shows Total Revenue (Price Γ— Quantity).
πŸ“ Knowledge Check
1. In the Elasticity Explorer, when demand is inelastic and price rises, what happens to total revenue?
2. Which of the following demand curves would look steepest on a standard price–quantity graph?
3. If a good has perfectly inelastic demand and its price rises by 40%, how does quantity demanded change?
Section 7

Types of Goods

How does demand change when income goes up β€” and when the price of a related good changes?

Key Vocabulary
Normal Good Inferior Good Income Elasticity Substitutes Complements
Normal Good β€” demand increases as consumer income rises. When people earn more money, they buy more of these goods. Examples: restaurant meals, travel, new clothes, electronics.
Inferior Good β€” demand decreases as consumer income rises. When people earn more money, they switch to better alternatives. Examples: instant noodles, second-hand goods, bus travel.
Income Elasticity of Demand (YED) measures how much demand for a good changes when consumer income changes.
YED > 0 β†’ Normal good  |  YED < 0 β†’ Inferior good
YED > 1 β†’ Luxury good (demand rises faster than income)
Substitutes β€” goods that can replace each other. When the price of one rises, demand for the other increases. Examples: Pepsi and Coke; tea and coffee; buses and taxis.
Complements β€” goods that are used together. When the price of one rises, demand for the other falls. Examples: printers and ink; cars and fuel; phones and phone cases.

Normal Goods and Inferior Goods

Price is not the only thing that changes consumer demand. Income matters too. When your income rises, you usually buy more of most goods β€” those are called normal goods. But some goods you buy less of when you get richer, because you switch to better options. Those are called inferior goods.

Example: When students graduate and get their first job, they often stop buying instant noodles (an inferior good) and start going to restaurants (a normal good). Their income rose, so their spending patterns changed.

Substitutes and Complements

Substitutes are goods that can replace each other. If the price of coffee rises, some people will switch to tea. Demand for tea goes up. The two goods are substitutes.

Complements are goods that are used together. If the price of printers rises, fewer people will buy printers β€” and so fewer people will also buy ink cartridges. Demand for ink falls too. The two goods are complements.

Example: Netflix raises its monthly price. Some subscribers cancel and sign up for Disney+ instead β€” Netflix and Disney+ are substitutes. At the same time, people who cancel Netflix may also use their internet less β€” streaming and fast internet are complements.
🍜 Inferior Goods

During economic downturns, sales of instant noodles rise because people have less money. When the economy improves, noodle sales fall again. This is classic inferior good behaviour.

πŸ”‘ Sign Summary

Income ↑ β†’ Demand ↑ = Normal good

Income ↑ β†’ Demand ↓ = Inferior good

Price of A ↑ β†’ Demand for B ↑ = Substitutes

Price of A ↑ β†’ Demand for B ↓ = Complements

πŸš€ Going Further Cross-Price Elasticity & Income Elasticity Formulas Not required for the unit test β–Ά

Economists measure the relationship between goods using two additional formulas. You are not required to calculate these for the unit test, but understanding them will prepare you well for future economics courses.

Income Elasticity of Demand (YED) measures how much demand changes when income changes.

YED = % Ξ”Qd Γ· % Ξ” Income
YED > 0 β†’ Normal good  |  YED < 0 β†’ Inferior good  |  YED > 1 β†’ Luxury good

Cross-Price Elasticity of Demand (XED) measures how demand for one good changes when the price of another good changes.

XED = % Ξ”Qd(A) Γ· % Ξ”P(B)
Positive XED β†’ Substitutes (goods that replace each other)
Negative XED β†’ Complements (goods used together)

These formulas are used by businesses to understand competition (substitutes) and product bundling (complements), and by governments to predict how taxes on one good affect related markets.

Matching Activity β€” Classify the Good
Click a scenario card to select it, then click the correct category bin. Score: 0/6
When incomes rise, demand for vacation flights increases.
When people earn more money, they stop buying store-brand cereal.
Coffee price rises; more people buy tea.
Fuel prices rise sharply; SUV sales fall.
During a recession, instant noodle sales increase.
Higher incomes lead to more gym memberships.
Normal Good
Inferior Good
Substitute
Complement
πŸ“ Knowledge Check
1. When consumer incomes rise and demand for a good falls, that good is classified as:
2. If the price of printers rises and demand for ink cartridges also falls, printers and ink are:
3. Which of the following goods would most likely have a positive income elasticity of demand (YED > 0)?
Practice Quiz

Unit 2 Review Quiz

8 questions covering the main ideas in this unit. Submit all answers at the end to see your score.

Unit 2 Β· Consumer Behaviour & Decision-Making
1. The Law of Diminishing Marginal Utility states that as you consume more of a good:
2. Total Utility from 3 slices = 150 utils. Total Utility from 4 slices = 175 utils. What is the Marginal Utility of the 4th slice?
3. A rational consumer compares two options β€” pizza and drinks. Right now, pizza gives more satisfaction per dollar. What should the consumer do?
4. The price of good X rises by 10% and quantity demanded falls by 25%. What is the price elasticity of demand, and what type is it?
5. A business raises its prices and sees its total revenue go up. This tells us that demand is:
6. Which of the following goods is most likely to have INELASTIC demand?
7. When the price of coffee rises, demand for tea increases. Coffee and tea are:
8. As household incomes rise, sales of instant noodles fall. This makes instant noodles:
Sources & Further Reading
These resources match the BC Economics 12 curriculum for Unit 2.
BC Economics 12 Curriculum Guide
Official learning outcomes for consumer behaviour, utility, and elasticity.
curriculum.gov.bc.ca
Khan Academy β€” Utility Maximization
Free video lessons on marginal utility and consumer choice.
khanacademy.org/economics-finance-domain/microeconomics
Khan Academy β€” Price Elasticity of Demand
Step-by-step videos and practice questions on PED.
khanacademy.org β€” search "price elasticity of demand"
Economics: Today and Tomorrow β€” McGraw-Hill/Glencoe
Course textbook. Chapters on consumer behaviour and demand elasticity.
Course textbook