Microeconomics Lecture Notes
Chapter 10: Consumer Choice and Behavioral Economics
Key Topics:
- Utility and Consumer Decision Making
- Origin of Demand Curves
- Social Influences on Decision Making
- Behavioral Economics and Rational Choices
Sear's Decline
- Sears was once a leading department store but has declined due to shifts in consumer behavior.
- Importance of understanding consumer behavior for business success.
10.1 Utility and Consumer Decision Making
Utility
- Definition: Satisfaction received from consuming goods/services.
- Marginal Utility (MU): Change in total utility from consuming an additional unit.
Principle of Diminishing Marginal Utility
- Initial consumption offers high marginal utility, which decreases with additional consumption.
Budget Constraints
- Consumers operate under income limitations.
- Marginal Utility per Dollar: Helps determine optimal purchasing decisions.
Equalizing Marginal Utility per Dollar
- Consumers aim to balance marginal utility per dollar across purchases.
Impact of Price Changes
- Income Effect: Change in consumption due to perceived income change.
- Substitution Effect: Change in consumption due to relative price changes.
10.2 Origin of Demand Curves
- Law of Demand: Price falls, demand rises due to substitution and income effects.
10.3 Social Influences on Decision Making
Social Influences
- Social factors can affect consumption choices.
- Examples: Celebrity endorsements, network externalities.
Fairness and Market Behavior
- Consumers value fairness, influencing their purchasing behavior.
10.4 Behavioral Economics: Rational Choices?
Behavioral Economics
- Study of seemingly irrational consumer behaviors.
Common Mistakes
- Ignoring nonmonetary costs.
- Failing to ignore sunk costs.
- Unrealistic future behavior assumptions.
Behavioral Economics in Practice
- Rules of Thumb: Simplified decision-making strategies.
- Anchoring: Irrelevant information influencing decisions.
Case Study: J.C. Penney's Pricing Strategy
- Shift to everyday low prices led to reduced sales.
- Example of anchoring effect through perceived value of sales.
Conclusion
Understanding consumer behavior, including social influences and behavioral economics, is crucial for businesses and economic strategies.