Lecture Economics (19/e) - Chapter 6: Consumer behavior

In this chapter, you will see how individual consumers allocate their incomes among the various goods and services available to them. Given a certain budget, how does a consumer decide which goods and services to buy? This chapter will develop a model to answer this question. This chapter will also survey some of the recent insights about consumer behavior provided by the field of behavioral economics.

Consumer Behavior 06

• Utility is the satisfaction one gets from consuming a good or service

• Not the same as usefulness

• Subjective

• Difficult to quantify

• Util is one unit of satisfaction or

pleasure

• Total utility is the total amount of

satisfaction

• Marginal utility is the extra satisfaction from an additional unit of the good

MU = ΔTU/ΔQ

• As consumption of a good or service increases, the marginal utility

obtained from each additional unit of the good or service decreases

• Explains downward sloping demand

0 10 20 30

10 8 6 4 2 0 -2

(2) Total Utility, Utils

(3) Marginal Utility, Utils

0

1

2

3

4

5

6

7

0 10 18 24 28 30 30 28

10 8 6 4 2 0 -2

Total Utility

TU

(1)

Tacos

Consumed

Per Meal

MU

] ] ] ] ] ] ]

• Rational behavior

• Preferences

• Budget constraint

• Prices

• Consumer allocates his or her income

so that the last dollar spent on each

product yields the same amount of

extra (marginal) utility

• Algebraically

MU of product A MU of product B Price of A Price of B

=

LO3

0

$1

$2

Quantity Demanded of Oranges

$2 1

4 6

Quantity Demanded

Price Per

Orange

D O

6-8

• Income effect

• The impact that a price change has

on a consumer’s real income

• Substitution effect

• The impact that a change in a product’s price has on its relative expensiveness

• How people actually deal with life’s

ups and downs

• People judge things relative to the

status quo

• People experience:

• People are loss adverse

• Consumers see any price increase as

a loss relative to the status quo

• Producers are reducing package size instead of raising prices

• Consumers evaluate events in a

particular mental frame

• New information alters the frame in

which the consumer defines whether situations are gains or losses

• 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