Ch 10. Consumer Choice and Behavioral Economics PDF

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I took my own notes and added what the professor said was important during class.
It helped me to get an A in the class....

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Utility and Consumer Decision Making utility - the enjoyment or satisfaction people receive from consuming goods and services - The goal of a consumer is to spend available income so as to maximize utility; howev er, the utility is difficult to measure because there is no way of knowing exactly how m uch enjoyment or satisfaction someone receives from consuming a product. marginal utility - the change in total utility a person receives from consuming one additional unit of a g ood or service the law of diminishing marginal utility - the principle that consumers experience diminishing additional satisfaction as they co nsume more of a good or service during a given period of time - For nearly every good or service, the more you consume during a period of time, the l ess you increase your total satisfaction from each additional unit you consume. budget constraint - the limited amount of income available to consumers to spend on goods and services - The principle of diminishing marginal utility helps us understand how consumers can best spend their limited incomes on the products available to them. For maximizing utility, marginal utility per dollar spent must be the same for both goo ds, and it’s the budget constraint. The income effect and substitution effect of a price change - When price decreases, consumer purchasing power increases. a. The income effect causes quantity demanded to increase, if a normal good, a nd decrease, if an inferior good. b. The substitution effect causes the opportunity cost of consuming a good to de crease when the price decreases, which causes the quantity of the good dem anded to increase - When the price increases, consumer purchasing power decreases. a. The income effect causes quantity demanded to decrease, if a normal good, and increase, if an inferior good. b. The substitution effect causes the opportunity cost of consuming a good to inc rease when the price increases, which causes the quantity of the good deman ded to decrease. How to derive the market demand curve - Each individual has a demand curve for a product. by adding the individual demand a t each price, we obtain the market demand for it. Social Influences on Decision Making The decision to buy a product depends partly on the characteristics of the product and partly on how many other people are buying the product. - the effects of celebrity endorsements a. If consumers believe that media stars or professional athletes use a product, demand for the product will often increase. - network externality a. a situation in which the usefulness of a product increases with the number of consumers who use it. i. The more people who own iPads, the more apps other firms will produ ce for the iPad.

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fairness a. People care about fairness. ex) tipping servers in restaurants and making don ations to charity

Behavioral Economics: Do People Make Their Choices Rationally? behavioral economics - the study of situations in which people make choices that do not appear to be econo mically rational - pitfalls in decision making a. They take into account monetary costs but ignore nonmonetary opportunity c osts. i. endowment effect 1. the tendency of people to be unwilling to sell a good they alrea dy own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn’t already own it b. They fail to ignore sunk costs. i. sunk cost 1. a cost that has already been paid and cannot be recovered c. They are unrealistic about their future behavior. - Taking into account nonmonetary costs, ignoring sunk costs, and being more realistic about future behavior are three ways in which consumers are able to improve the dec isions they make....