Lecture 6 Consumer Behavior PDF

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Lecture 6: Consumer Behavior Utility as a Concept   

Utility is a conceptual measure of consumer satisfaction or value Assume that consumers make choices to maximize utility Assess utility based on observes consumer choices o Circular nature of the argument is important o Consumers are assumed to value those things they choose to consume

Diminishing Marginal Utility    

Key concept in utility theory - consumers derive less value from successive units of a particular type of consumption You value your first coffee of the day more that your second Each additional coffee adds some utility, but less than the previous one Focus on incremental changes - ie. Consuming one more or fewer of a particular product

Total Utility vs. Marginal Utility

Utility Maximization    

The consumption decision - Do I buy another cup of coffee? Benefit is the marginal utility of the next unit purchased What is the opportunity cost of buying another coffee? What is the marginal utility of my next best purchase option?

Demand Curves 

Individual demand curves derived form utility maximization o Marginal utility is declining o As price increases, number of units purchased falls

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o Individual demand curve slopes downward Market demand - just individual demand curves added together o Market demand curve slopes downward

Downward Sloping Demand    

Previous analysis focuses on marginal utility Now consider two different effects Substitution effects - how do relative prices affect behavior? Income effects - when consumers feel richer or poorer, how do their decisions change?

Substitution Effect  

When the price of coffee increases, other products become relatively cheaper Maximizing utility requires substituting towards consuming more of other products, and less coffee

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Substitution effects are always negative - increasing relative price of a good reduces consumption of that good

Income Effect   

Changing prices make consumers feel richer or poorer Increasing the price of coffee reduces the set of choices I can afford to buy When I feel poorer, do I buy more of a product or less of a product?

Consumer Surplus  

Focus on the consumer side - consumer surplus measures value to consumers minus the price paid for the product Area between the demand curve and the price defines consumer surplus...