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October 15, 2103

October 15, 2103. HW check: AP Externality Practice Problems and HW problems from Ch. 5 (#’s 4-7) Begin Chapter 6: Consumer Behavior HW- Chapter 6 Problems #1-5 ***Unit II Exam Thursday & Friday*** ***Unit II Vocab due Thursday*** ***Review session moved to Wednesday this week!!!***.

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October 15, 2103

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  1. October 15, 2103 HW check: AP Externality Practice Problems and HW problems from Ch. 5 (#’s 4-7) Begin Chapter 6: Consumer Behavior HW- Chapter 6 Problems #1-5 ***Unit II Exam Thursday & Friday*** ***Unit II Vocab due Thursday*** ***Review session moved to Wednesday this week!!!***

  2. Unit 2- Product MarketsChapter 6Consumer Behavior

  3. Law of Diminishing Marginal Utility Let’s compare shopping carts… Law of DMU: Utility: The satisfaction one gets from consuming a commodity. Not the same as usefulness (Picasso?) Subjective Difficult to quantify… So use your imagination… 6-3 LO1
  4. Law of Diminishing Marginal Utility Util: Imaginary unit of satisfaction or pleasure. Total utility: The total amount of satisfaction one receives from consuming a specific quantity of a good (i.e. 10 units) Marginal utility: The extra satisfaction from an additional unit of a good. MU: change in Total Utility as a result inchange ofquantity consumed. 6-4 LO1
  5. 30 20 Total Utility (Utils) ] ] ] ] ] ] ] 10 0 1 1 2 2 3 3 4 4 5 5 6 6 7 7 10 8 6 Marginal Utility (Utils) 4 2 0 -2 Total Utility and Marginal Utility Total Utility (1) Tacos Consumed Per Meal (2) Total Utility, Utils (3) Marginal Utility, Utils TU 0 10 18 24 28 30 30 28 0 1 2 3 4 5 6 7 10 8 6 4 2 0 -2 Note the negative! MU 6-5 LO1
  6. Theory of Consumer Behavior The Law of DMU explains how consumers allocate their incomes among the many commodities available! Rational Behavior (“get the most for your money”) Preferences Budget constraint (limited contribution = limited income) Prices (scarcity is a reality) So the consumer must compromise… 6-6 LO2
  7. Utility Maximizing Rule Lotta goods and services out there…but which combo will give greatest utility??? Utility Maximizing Rule: The last dollar spent on each product yields the same amount of extra (marginal) utility This leads to consumer equilibrium. Algebraically: MU of product AMU of product B Price of A Price of B = 6-7 LO2
  8. 6-8 LO2
  9. What if the price of oranges dropped to $1??? 6-9 LO2
  10. $2 Quantity Demanded Price Per Orange Price of Orange $1 0 4 6 Quantity Demanded of Oranges Deriving the Demand Curve…with other prices 4 $2 6 1 DO 6-10 LO3
  11. 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 it’s relative expensiveness 6-11 LO4
  12. Applications and Extensions New products iPod Diamond-water paradox Opportunity cost and time Medical care purchases Cash and noncash gifts 6-12 LO5
  13. Prospect Theory How people actually deal with life’s up 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 6-13 LO5
  14. 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 6-14 LO5
  15. 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 6-15 LO5
  16. Anchoring and Credit Card Bills Estimates of value are influenced by recent information no matter how irrelevant Can lead to people altering valuations unconsciously 6-16 LO5
  17. Mental Accounting and Warranties Separate purchases into “mental accounts” rather than looking at the big picture Mental accounting exaggerates any potential loss 6-17 LO5
  18. 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 6-18 LO5
  19. Nudging People Using behavioral economics to change people’s behavior Subtle manipulations are used to generate socially better outcomes Unaware of being manipulated 6-19 LO5
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