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Unformatted text preview: Chapter 9 Consumer Choice and Behavioral Economics Chapter Summary As you learned in Chapter 1, economists assume that people are rational and try to make themselves as well off as possible. Economists therefore assume that when consumers spend their income they are trying to maximize their utility. Utility means enjoyment or satisfaction . The marginal utility a person receives from consuming an additional unit of a good or service will diminish as more is consumed in a given period of time. If you like Pepsi, your satisfaction will increase less from drinking a second glass than it did from drinking the first glass, and less from drinking a third glass than it did from drinking the second glass. Consumers maximize their utility when the marginal utility per dollar for each good consumed is equal. In Chapter 3, you learned about demand curves. Demand curves slope downward because of the income and substitution effects from a change in price. A fall in price makes a good cheaper relative to substitutes—the substitution effect—but also allows a consumer to purchase more with a given among of money—the income effect. For normal goods, the income and substitution effects both lead consumers to buy more of a good after its price falls. For inferior goods, the income effect associated with a decrease in price causes a decrease in quantity demanded, whereas the substitution effect causes quantity demanded to increase. Social factors affect consumer choices. Firms such as Coca-Cola and Nike have long used celebrity endorsements to induce consumers to buy their products because some consumers want to buy products associated with celebrities. There are network externalities in the consumption of a product if the usefulness of the product increases with the number of people who use it. Your cell phone is useful because many other people also own one. Though consumer choice theory assumes consumers are rational, many people like to be treated fairly and try to treat others fairly even if this makes them worse off financially. Examples of this behavior are voluntary tipping in restaurants and donating to charities. A new area of economics, behavioral economics , studies consumer decisions such as these that appear not to be rational. One of the goals of economics is to suggest ways for people to make better decisions. Consumers can improve their decision making by avoiding common pitfalls. Among the most common of these pitfalls are (1) ignoring the nonmonetary opportunity costs of choices (2) failure to ignore sunk costs and (3) being overly optimistic about future behavior. CHAPTER 9 | Consumer Choice and Behavioral Economics 228 Learning Objectives When you finish this chapter, you should be able to: 1. Define utility and explain how consumers choose goods and services to maximize their utility....
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This note was uploaded on 01/28/2011 for the course ACCT 2001 taught by Professor Lowe during the Spring '08 term at LSU.
- Spring '08