Consumer Behavior 06 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All...

Consumer Behavior

06

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

21 - 2Copyright McGraw-Hill/Irwin, 2002

The Law of Demand

Law of Diminishing Marginal Utility

Total and Marginal Utility

Theory of Consumer Behavior

Utility Maximizing Combination

Utility Maximization and the Demand Curve

Applications and Extensions

Key Terms

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Chapter Objectives• Total Utility, Marginal Utility, and the Law of

Diminishing Marginal Utility• How Rational Consumers Compare Marginal

Utility-to-Price Ratios for Products in Purchasing Combinations to Maximize Total Utility

• How to Derive the Demand Curve by Observing Behavior

• How the Utility-Maximization Model Highlights Income and Substitution Effects of a Price Change

• Budget Lines, Indifference Curves, Utility Maximization, and Demand Derivation in the Indifference Curve Model of Consumer Behavior


The Law of Demand







Key Terms

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THE LAW OF DEMANDA Closer Look…

The Income Effect A lower price frees income for additional purchases - and vice versa

The Substitution Effect A lower price relative to other goods attracts new buyers - and vice versa


The Law of Demand







Key Terms

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LAW OF DIMINISHINGMARGINAL UTILITY

• Utility Defined• Subjective Nature• Difficult to QuantifyTotal UtilityMarginal Utility

graphically examined...


The Law of Demand







Key Terms

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TOTAL AND MARGINAL UTILITYTacos

consumedper meal

TotalUtility,Utils

MarginalUtility,Utils

01

010

Units consumed per meal


30

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10 8 6 4 2 0 -2

0 1 2 3 4 5 6 7

1 2 3 4 5 6 7


The Law of Demand







Key Terms

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consumedper meal

TotalUtility,Utils


01

010 10



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The Law of Demand







Key Terms

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consumedper meal

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10 8



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The Law of Demand







Key Terms

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consumedper meal

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0101824

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The Law of Demand







Key Terms

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consumedper meal

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The Law of Demand







Key Terms

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consumedper meal

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The Law of Demand







Key Terms

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consumedper meal

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The Law of Demand







Key Terms

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consumedper meal

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The Law of Demand







Key Terms

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consumedper meal

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ObserveDiminishing

MarginalUtility


The Law of Demand







Key Terms

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THEORY OF CONSUMER BEHAVIOR

A Typical Consumer...• Exhibits Rational

Behavior• Has Clear-Cut

Preferences• Subject to a Budget

Constraint• Responds to Price

Changes


The Law of Demand







Key Terms

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THEORY OF CONSUMER BEHAVIOR

Utility Maximizing Rule

The consumer’s money income should be allocated so that the last dollar spent on each product yields the same amount of extra (marginal) utility

illustrated...


The Law of Demand







Key Terms

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First 10 10 24 12

Unit ofproduct

$ 10 incomeProduct A: Price = $1 Product B: Price = $2

Marginalutility,utils

Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)

UTILITY MAXIMIZING COMBINATION

How should the $10 Income be allocated?


The Law of Demand







Key Terms

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First 10 10 24 12

Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


Examine the twomarginal utilities


The Law of Demand







Key Terms

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First 10 10 24 12

Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


Examine the twomarginal utilities

…per dollar


The Law of Demand







Key Terms

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First 10 10 24 12

Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


Decision: Buy 1Product B for $2


The Law of Demand







Key Terms

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First 10 10 24 12Second 8 8 20 10Third 7 7 18 9Fourth 6 6 16 8Fifth 5 5 12 6Sixth 4 4 6 3Seventh 3 3 4 2

Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


What next?


The Law of Demand







Key Terms

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Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


What next?Buy one of each


The Law of Demand







Key Terms

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Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


and then...($5 left)


The Law of Demand







Key Terms

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Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


third unit of product B


The Law of Demand







Key Terms

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Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


$3 left...


The Law of Demand







Key Terms

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Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


$3 left...Buy both!


The Law of Demand







Key Terms

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Unit ofproduct



Marginalutility per

dollar(MU/price)


Marginalutility per

dollar(MU/price)


Income is gone...the last dollar spent on

each good gave the sameutility (8) per dollar


The Law of Demand







Key Terms

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Algebraic Restatement of theUtility Maximization Rule

MU of product A

Price of A

MU of product B

Price of B=



The Law of Demand







Key Terms

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UTILITY MAXIMIZATION ANDTHE DEMAND CURVE

Deriving the Demand Schedule and Curve

• Preferences or Tastes• Money Income• Prices of Other Goods

Given from the previous example schedule:


The Law of Demand







Key Terms

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Create a demand schedule from thepurchase decisions as the price of the product is varied ...

Price per unit of B Quantity Demanded

$2 4 1 6

Graphically…



The Law of Demand







Key Terms

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Quantity Demanded of Good B

Pri

ce p

er u

nit

of

Goo

d B $2

1

0 4 6

DB


The Law of Demand







Key Terms

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Quantity Demanded of Good B

Pri

ce p

er u

nit

of

Goo

d B $2

1

0 4 6

DB

Substitution Effectsand Income Effects

Revisited


The Law of Demand







Key Terms

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• DVDs and DVD Players

• The Diamond-Water Paradox

• The Value of Time

• Medical Care Purchases

• Cash and Noncash Gifts

O 7.3


The Law of Demand







Key Terms

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Criminal Behavior• Economic Analysis Offers Insights

Into Property Crimes Such as Robbery, Burglary, and Auto Theft

• Theory of a Rational Consumer• Buy Versus Steal Decision• Compare Marginal Utility of Item

Versus Costs – Guilt, Fines, or Prison Time

• Crime May Be Reduced by “Increasing” the “Price of Crime”

Prospect Theory

• How people actually deal with life’s up and downs

• People judge things relative to the status quo

• People experience:• Diminishing marginal utility for gains

• Diminishing marginal disutility for losses

• People are loss adverse

LO5 6-34

Losses and Shrinking Packages

• Consumers see any price increase as a loss relative to the status quo

• Producers are reducing package size instead of raising prices

LO5 6-35

Framing Effects and Advertising

• Consumers evaluate events in a particular mental frame

• New information alters the frame in which the consumer defines whether situations are gains or losses

LO5 6-36

Anchoring and Credit Card Bills

• Estimates of value are influenced by recent information no matter how irrelevant

• Can lead to people altering valuations unconsciously

LO5 6-37

Mental Accounting and Warranties

• Separate purchases into “mental accounts” rather than looking at the big picture

• Mental accounting exaggerates any potential loss

LO5 6-38

The Endowment Effect

• Market transactions may be affected by the endowment effect because:

• The seller has a tendency to demand a higher price

• The buyer has a tendency to offer a lower price

LO5 6-39

Nudging People

• Using behavioral economics to change people’s behavior

• Subtle manipulations are used to generate socially better outcomes

• Unaware of being manipulated

LO5 6-40


The Law of Demand







Key Terms

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Key Terms

• Law of diminishing marginal utility

• Utility• Total utility• Marginal utility• Rational behavior• Budget constraint• Utility maximizing rule• Income effect• Substitution effect

7-41

Consumer Behavior 06 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All...

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Transcript of Consumer Behavior 06 McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All...