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06
Consumer Behavior
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
Law of Diminishing Marginal Utility
• Utility is the satisfaction one gets from
consuming a good or service
• Not the same as usefulness
• Subjective
• Difficult to quantify
LO1
6-2
Law of Diminishing Marginal Utility
• Util is one unit of satisfaction or
•
•
LO1
pleasure
Total utility is the total amount of
satisfaction
Marginal utility is the extra satisfaction
from an additional unit of the good
MU = ΔTU/ΔQ
6-3
Law of Diminishing Marginal Utility
• As consumption of a good or service
•
LO1
increases, the marginal utility
obtained from each additional unit of
the good or service decreases
Explains downward sloping demand
6-4
Total Utility and Marginal Utility
0
1
2
3
4
5
6
7
LO1
(2)
(3)
Total Marginal
Utility, Utility,
Utils
Utils
0
]
10
]
18
]
24
]
28
]
30
]
30
]
28
10
8
4
2
0
-2
30
TU
20
10
0
6
Marginal Utility (Utils)
(1)
Tacos
Consumed
Per Meal
Total Utility (Utils)
Total Utility
1
2
3
4
5
6
7
1
2
3
4
5
6
7 MU
10
8
6
4
2
0
-2
6-5
Theory of Consumer Behavior
• Rational behavior
• Preferences
• Budget constraint
• Prices
LO2
6-6
Utility Maximizing Rule
• Consumer allocates his or her income
so that the last dollar spent on each
product yields the same amount of
extra (marginal) utility
• Algebraically
MU of product A
Price of A
LO2
=
MU of product B
Price of B
6-7
Deriving the Demand Curve
Price Per Quantity
Orange Demanded
$2
4
1
6
Price of Orange
$2
$1
DO
0
4
6
Quantity Demanded of Oranges
LO3
6-8
Income and Substitution Effects
• Income effect
• The impact that a price change has
•
LO4
on a consumer’s real income
Substitution effect
• The impact that a change in a
product’s price has on its relative
expensiveness
6-9
Prospect Theory
• How people actually deal with life’s
•
•
ups and downs
People judge things relative to the
status quo
People experience:
• Diminishing marginal utility for gains
• Diminishing marginal disutility for losses
• People are loss adverse
LO5
6-10
Losses and Shrinking Packages
• Consumers see any price increase as
•
LO5
a loss relative to the status quo
Producers are reducing package size
instead of raising prices
6-11
Framing Effects and Advertising
• Consumers evaluate events in a
•
LO5
particular mental frame
New information alters the frame in
which the consumer defines whether
situations are gains or losses
6-12
The Endowment Effect
• Market transactions may be affected
by the endowment effect because:
• The seller has a tendency to
demand a higher price
• The buyer has a tendency to offer a
lower price
LO5
6-13