3. Consumer Choices

—> how consumer make decisions when facing trade-offs.

- Consumers try to attain the highest level of satisfaction possible from the consumption of goods.

- More is preferred to less. Larger quantity > smaller quantity. + Consumers are never really sated.

- Buyers seek to maximize their utility.

- Consumers act in self-interest and do not consider the utility of others.

Utility

… is the satisfaction derived from the consumption of a product.

- Utility tells us about ranking or alternatives.

- The amount buyers are willing or prepared to pay for a good tells us something about the value   they place on it.

- The opportunity costs is what was given up to make a purchase.

Marginal utility

- Increase in utility that the consumer gets from an additional unit of that good

(Since more is better marginal utility is always positive)

additional satisfaction from consuming extra units of a good is falling

(diminishing marginal utility is always negative)

Imagine you are very hungry and so you order a pizza. Since you are very hungry, your satisfaction level at the first slice is 10 (10 is the highest value). With each slice of pizza, however, you become increasingly fuller, which is why your satisfaction decreases with each slice. With the second piece you have a satisfaction of 8 with the 3rd a 6 and so on.

= “equal utility curves”

1.Higher indifference curves are preferred to lower ones (monotonicity assumption)

2.They slope downward

3.They do not cross (Wouldn ´t make sense see book page 82)

4. They are convex (bowed inward)

MRS= d X1 / d X2

look in the script

An increase in income from €1,000 per month to €1,500 per month means the consumer can now buy more of both goods assuming the price of cola and pizza remain the same. The result is a shift in the budget constraint to the right.

However, slope is still the same even if shifted, because the prices for both cola and pizza remain the same.

If the price of cola rises from € 2 per litre to € 5 per litre, the consumer could now afford to buy less cola with their income. The budget constraint pivots inwards, and if the consumer devoted all their income to cola, they would only be able to buy 200 litres compared to 500 litres before the price changed. If the price of cola falls from € 2 per litre to €1.60 per litre, the consumer could afford to buy more cola with their income. The budget constraint pivots outwards, and the consumer could now buy 625 litres of cola per month if they devoted all their income to cola.

Combination fo Budget Constrain & Indifference curve

Inferior good

A good is an inferior good if the consumer buys less of it when their income rises. Here cola is an inferior good:

when the consumer’s income increases and the budget constraint shifts outwards, the consumer buys more pizza but less cola.

Normal good

if a consumer wants more of a good when their income rises, economists call it a normal good

look table on goodnotes

3 Standard Household decisions

Which goods to buy and what amounts to spend on different consumption goods.—> Maximizing the utility.

How much time to devote to work and leisure.

How to distribute spending over several periods of time.

Heuristics

Anchoring – using familiarity to make decisions.

Availability – assessing risks of the likelihood of something happening.

Representativeness – decisions made based on how representative something is to a stereotype.

Persuasion – attributes a consumer attaches to a product or brand.

Simulation – visualising or simulating the outcome of a decision.