Transcript McConnell PP Ch 09

9
Consumer Behavior
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Law of Diminishing Marginal Utility
• Utility is the satisfaction one gets from
consuming a good or service
• Not the same as usefulness
• Subjective
• Difficult to quantify
LO1
Law of Diminishing Marginal Utility
• Util is one unit of satisfaction or
•
•
LO1
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
Law of Diminishing Marginal Utility
• As consumption of a good or service
•
LO1
increases, the marginal utility
obtained from each additional unit of
the good or service decreases
Explains downward sloping demand
Total Utility and Marginal Utility
0
1
2
3
4
5
6
7
LO1
(2)
(3)
Total Marginal
Utility, Utility,
Utils
Utils
0
]
10
]
18
]
24
]
28
]
30
]
30
]
28
10
8
4
2
0
-2
30
TU
20
10
0
6
Marginal Utility (Utils)
(1)
Tacos
Consumed
Per Meal
Total Utility (Utils)
Total Utility
1
2
3
4
5
6
7
1
2
3
4
5
6
7 MU
10
8
6
4
2
0
-2
Theory of Consumer Behavior
• Rational behavior
• Preferences
• Budget constraint
• Prices
LO2
Utility Maximizing Rule
• 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
Price of A
LO2
=
MU of product B
Price of B
Numerical Example
The Utility Maximizing Combination of Apples and Oranges Obtainable with an
Income of $10
(2)
Apple (Product A):
Price = $1
(3)
Oranges (Product B):
Price = $2
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility per
dollar
(MU/Price)
(a)
Marginal
Utility,
Utils
(b)
Marginal
Utility per
dollar
(MU/Price)
First
10
10
24
12
Second
8
8
20
10
Third
7
7
18
9
Fourth
6
6
16
8
Fifth
5
5
12
6
Sixth
4
4
6
3
Seventh
3
3
4
2
(1)
Unit of
Product
LO2
Decision-Making Process
Sequence of Purchases to Achieve Consumer Equilibrium, Given the data in
Table 6.1
Marginal
Choice
Utility
Number Potential Choices per Dollar
LO2
Purchase Decision
Income
Remaining
1
First Apple
First Orange
10
12
First orange for $2
$8 = $10 - $2
2
First Apple
Second Orange
10
10
First apple for $1
and Second orange for $2
$5 = $8 -$3
3
Second Apple
Third Orange
8
9
Third orange for $2
$3 = $5 - $2
4
Second Apple
Fourth Orange
8
8
Second apple for $1
and Fourth orange for $2
$0 = $3 - $3
Deriving the Demand Curve
Price Per Quantity
Orange Demanded
$2
4
1
6
Price of Orange
$2
$1
DO
0
4
6
Quantity Demanded of Oranges
LO3
Income and Substitution Effects
• Income effect
• The impact that a price change has
•
LO4
on a consumer’s real income
Substitution effect
• The impact that a change in a
product’s price has on it’s relative
expensiveness
Applications and Extensions
• New products
• iPod
• Diamond-water paradox
• Opportunity cost and time
• Medical care purchases
• Cash and noncash gifts
LO5
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
Losses and Shrinking Packages
• Consumers see any price increase as
•
LO5
a loss relative to the status quo
Producers are reducing package size
instead of raising prices
Framing Effects and Advertising
• Consumers evaluate events in a
•
LO5
particular mental frame
New information alters the frame in
which the consumer defines whether
situations are gains or losses
Anchoring and Credit Card Bills
• Estimates of value are influenced by
•
LO5
recent information no matter how
irrelevant
Can lead to people altering valuations
unconsciously
Mental Accounting and Warranties
• Separate purchases into “mental
•
LO5
accounts” rather than looking at the
big picture
Mental accounting exaggerates any
potential loss
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
Nudging People
• Using behavioral economics to
•
•
LO5
change people’s behavior
Subtle manipulations are used to
generate socially better outcomes
Unaware of being manipulated