Chapter 7: Consumer Behavior

• Law of diminishing marginal utility - Added satisfaction declines as a consumer acquires additional units of a given product

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• Utility - Want-satisfying power
  • Not the same as usefulness
  • Subjective - The utility of a product differs b/w people
  • Difficult to quantify (but measured w/ utils)
• Total utility - Total amount of satisfaction/pleasure a person derives from consuming some specific quantity
• Marginal utility - Extra satisfaction gained from an additional unit
• Law of diminishing marginal utility explains why the demand curve for a product slopes downward
  • Consumer will only buy additional units of a product if its price falls
• Theory of consumer behavior
  • Rational behavior - Consumers are rational people who use income to derive the greatest amount of utility
  • Preferences - Consumers have clear-cut preferences for available goods
  • Budget constraint - Consumers have a fixed, limited amount of money income
  • Prices - Every good carries a price tag
• Utility-maximizing rule - To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility
• Consumer equilibrium - When the consumer has balanced their margins and has no incentive to alter their spending pattern
• Consumer decision-making process
  • Buy more of the good that provides more marginal utility per dollar
  • Must choose a combination within the constraints of a consumer’s income
  • Can obtain other combinations, but none will be as good as the one that provides the most total utility
• Utility-maximizing rule
  • Marginal utility of product A / Price of A = Marginal utility of product B / Price of B
  • Equation not fulfilled → Reallocation of consumer expenditures will increase total utility
• Utility maximization + the demand curve
  • Product price + quantity demanded are inversely related
  • Income effect - Impact that a change in the price of a product has on a consumer’s real income and the quantity demanded
  • Substitution effect - Impact that a change in a product’s price has on its relative expensiveness and the quantity demanded
  • Substitute purchases towards goods that yield greater utility in order to restore consumer equilibrium

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