ECON 102 Chapter 6 Slides

Consumer Choice and Demand

Budget Line

• Represents combinations of two goods purchasable with:

  • Given income or budget

  • Fixed prices of each good

• Example: Weekly “FUN” budget of $60.

  • Night out at club: $20/night.

Consumption Choices

• Club nights (variable) and romantic dates (variable).

• Example prices:

  • Activity 1: Club night at $20

  • Activity 2: Romantic date at $10

    • Creative date options include:

      1. Roberto’s Taco: $3.75 x 2 + $2.65 Soda = $10

      2. Bellagio Fountains = $0

      3. Netflix Movie = $0

Changes in Prices

• If streaming a movie costs $10, total price for a Date night may increase to $20.

• Student discount at local club lowers price to $15/night.

Utility Theory

• Utility: Satisfaction from consuming a good or service.

• Marginal Utility Analysis: Evaluates consumer decision-making within budget constraints.

  • Consumers allocate income to maximize well-being.

  • Identifies optimal point on budget line for maximum utility.

Diminishing Marginal Utility

• As a product is consumed, additional satisfaction from each unit decreases.

  • Marginal utility can fall and may become negative.

• Graphs demonstrate total utility and marginal utility as consumption increases.

Utility Maximization Strategy

• Rule states individuals achieve total satisfaction when marginal utility/$ is equal across goods.

• Example analysis for rides at Cedar Point:

  • Total Utility (TU): compares utility from Top Thrill Dragster and Blue Streak rides.

  • Decision-making influenced by time and ride preferences.

Limitations of Marginal Utility Analysis

• Difficulty in measuring actual utility received by consumers.

• Not all decisions follow strict utility rationality due to behavioral economics.

Behavioral Factors

• Sunk Cost Fallacy: Continued investment based on past expenditures; e.g., not dropping a class due to tuition already paid.

• Framing Bias: Influence of presentation on decision-making; e.g., sale tactics.

• Overconfidence: Misjudgment of personal commitment, e.g., unused gym memberships.

• Overvaluing Present vs Future: Preference against long-term benefits, like retirement plans.

• Altruism: Generosity in actions, such as tipping beyond service quality.

Practice Questions

• Scenario analysis to gauge understanding of marginal utility applications and consumer decision factors.