1. 06
Consumer Behavior
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. 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

3. Law of Diminishing Marginal Utility
Util is one unit of satisfaction or 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
LO1
6-3

4. Law of Diminishing Marginal Utility
As consumption of a good or service increases, the marginal utility obtained from each additional unit of the good or service decreases
Explains downward sloping demand
LO1
6-4

5. Total Utility and Marginal Utility10 20 30 8 6 4 2 -2 1 3 5 7
Total Utility (Utils)
Marginal Utility (Utils)
(1)
Tacos
Consumed
Per Meal
(2)
Total
Utility,
Utils
(3)
Marginal
Utility,
Utils TU 1 2 3 4 5 6 7 10 18 24 28 30 ] 10 8 6 4 2 -2 MU
LO1
6-5

6. Theory of Consumer Behavior
Rational behavior
Preferences
Budget constraint
Prices
LO2
6-6

7. 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 MU of product B
Price of A Price of B =
LO2
6-7

8. Deriving the Demand Curve
Price of Orange $1 $2 4 6
Quantity Demanded of Oranges
Quantity
Demanded
Price Per
Orange $2 4 1 6 DO
LO3
6-8

9. Income and Substitution Effects
Income effect
The impact that a price change has on a consumer’s real income
Substitution effect
The impact that a change in a product’s price has on its relative expensiveness
LO4
6-9

10. How people actually deal with life’s ups and downs
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

11. Losses and Shrinking Packages
Consumers see any price increase as a loss relative to the status quo
Producers are reducing package size instead of raising prices
LO5
6-11

12. Framing Effects and Advertising
Consumers evaluate events in a particular mental frame
New information alters the frame in which the consumer defines whether situations are gains or losses
LO5
6-12

13. 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