Theory Of Consumer Behavior PDF

THEORY OF CONSUMER BEHAVIOR SELLERS WILL KEEP CHARGING WHATEVER OUTRAGEOUS PRICES THEY FEEL LIKE CHARGING BAD NEWS 2 YOU DON’T HAVE TO PAY THOSE PRICES. YOU HAVE YOUR FREE WILL. GOOD NEWS 3  WHY DO PEOPLE BUY GOODS...

THEORY OF CONSUMER BEHAVIOR SELLERS WILL KEEP CHARGING WHATEVER OUTRAGEOUS PRICES THEY FEEL LIKE CHARGING BAD NEWS 2 YOU DON’T HAVE TO PAY THOSE PRICES. YOU HAVE YOUR FREE WILL. GOOD NEWS 3  WHY DO PEOPLE BUY GOODS AND SERVICES? Because they derive some utility or value from them. We measure that utility by how much consumers are willing to pay 4 ACCORDING TO JEREMY BENTHAM Individuals make choices in order to promote pleasure and to avoid pain We make our choices in a way that maximizes the degree of satisfaction we gain from our activities. 5  UTILITY Example: Hamburger: You’re Is not the same as hungry enough to eat usefulness. 4 but there’s only a hamburger left worth Means only that you $3. think enough of If you bought the something to buy it. burger, you will get $3 worth of utility. 6  YOU’RE STILL HUNGRY… WHY NOT $2.75? And you happen to Because you’re not as walk to a second hungry as you were hamburger stand, you before you wolfed said to yourself “I’d be down that $2.75 willing to spend $2 on hamburger. a second burger” 7  YOU’RE STILL HUNGRY… NOTICE SOMETHING? Suppose you spent $2 As you get fuller, you on a second burger need less hamburgers! and would be willing to pay just $1 for a third. 8  MARGINAL UTILITY Is the additional utility derived from consuming one more unit of some good or service. 9  PRICE QD LAW OF MARGINAL 2.75 1 Hypothetical UTILITY Demand 2 2 Schedule for As we consume increasing 1 3 HAMBURGERS 0.25 4 amounts of a good or service, we derive UNITS MU PURCH diminishing utility, or Hypothetical ASED Marginal satisfaction, from each 1 2.75 Utility additional unit consumed 2 2 Schedule 3 1 4 0.25 10  PRICE UNITS MU TU PURCHA TOTAL UTILITY SED 2.75 1 2.75 2.75 Is the utility you derive from 2 2 2 4.75 consuming a certain number 1 3 1 5.75 of units of a good or service 0.25 4 0.25 6.00 11  MAXIMIZING UTILITY In real life there’s usually only one price. You won’t get $2.75→$0.25 hamburgers. With our limited incomes, we try to spend our money on what will give us the most satisfaction or utility. 12  MAXIMIZING UTILITY We do this by buying more and more until our marginal utility declines to the level of the price. Represented as: 13  MAXIMIZING UTILITY Example: If the price of hamburgers were $0.25 we’d buy 4 hamburgers immediately. Why? Because the MU of the burger is $0.25 Why 4? Remember, you’re hungry enough to eat 4!!! 14  MAXIMIZING UTILITY Suppose that a good or service were free? How many units would you consume? You would keep consuming units until the item’s MU is zero. 15  EXAMPLE: FREE BUFFET (MU) SATISFACTION (TU) 1st plate: VERY HUNGRY LOW 2nd plate: HUNGRY MEDIUM 3rd plate: FULL HIGH STOP HERE! 4th plate: SICK DECLINE (MEDIUM TO LOW) 16  3 PHASES OF THE UTILITY CURVE I II III TU MU 17  THERE IS NO ANSWER. Utility is not inherent in a particular good or service. What is the utility of a Utility is simply a measure of what the buyer is willing ballpoint pen? to pay. Bottled water? A lunch meal? Also, a person’s utility schedule can change over time. 18 FIN.