Consumer Behavior9McGraw-Hill/IrwinCopyright 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

Law of Diminishing Marginal UtilityUtility is the satisfaction one gets from consuming a good or serviceNot the same as usefulnessSubjectiveDifficult to quantify

LO1

Law of Diminishing Marginal UtilityUtil is one unit of satisfaction or pleasureTotal utility is the total amount of satisfactionMarginal utility is the extra satisfaction from an additional unit of the good MU = TU/Q

LO1

Law of Diminishing Marginal UtilityAs consumption of a good or service increases, the marginal utility obtained from each additional unit of the good or service decreasesExplains downward sloping demandLO1

Total Utility and Marginal UtilityLO1(2)TotalUtility,Utils(3)MarginalUtility,Utils012345670101824283030281086420-2Total UtilityTU(1)TacosConsumedPer MealMU

Theory of Consumer BehaviorRational behaviorPreferencesBudget constraintPrices

LO2

Utility Maximizing RuleConsumer allocates his or her income so that the last dollar spent on each product yields the same amount of extra (marginal) utilityAlgebraicallyMU of product A MU of product B Price of A Price of BLO2=

Deriving the Demand CurveLO3$2146DO

Income and Substitution EffectsIncome effectThe impact that a price change has on a consumers real incomeSubstitution effectThe impact that a change in a products price has on its relative expensivenessLO4

Prospect TheoryHow people actually deal with lifes ups and downsPeople judge things relative to the status quoPeople experience:Diminishing marginal utility for gainsDiminishing marginal disutility for lossesPeople are loss adverse

LO5

Losses and Shrinking PackagesConsumers see any price increase as a loss relative to the status quoProducers are reducing package size instead of raising pricesLO5

Framing Effects and AdvertisingConsumers evaluate events in a particular mental frameNew information alters the frame in which the consumer defines whether situations are gains or lossesLO5

The Endowment EffectMarket transactions may be affected by the endowment effect because:The seller has a tendency to demand a higher priceThe buyer has a tendency to offer a lower priceLO5

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