Every time Apple added a feature to the iPod, they said "want," "need," and "just have to have" a vast array of goods.
Product picked up when decision time came.
It depends on the price.
It wanted to sell consumer decisions.
In the first 2 years of production, how many iPhones will there be?
We have some clues for answering the questions.
We need eration, they set the initial price at $499, to look beyond that law to fashion more complete answers.
Apple's pricing dilemma underscores the impor downward-sloping shape of demand curves.
The field of economics doesn't have all the answers when it comes to consumer behavior.
It has a unique perspective that sets it apart from other fields of study.
The explanations of consumer behavior can be found in other fields of study.
Freud was the first to describe humans as bundles of fears, complexes, and anxieties.
We strive for higher levels of consumption to satisfy basic drives for security, sex, and ego satisfaction.
Like the most primitive of people, we clothe and adorn ourselves in ways that show who we are.
We need the security associated with mother's breast because we eat and smoke too much.
A source of warmth and security can be found in oversized homes and cars.
We often buy and consume things we don't want, just to assert our feelings against our parents.
Freud believes that the interplay of id, ego, and superego drives motivates us to buy.
Sociologists have additional explanations for our consumption behavior.
It may be easy for people with exceptional talents to be recognized.
For the ordinary person, recognition is dependent on consumption.
A sleek car, a newer fashion, a more exotic vacation are all expressions of identity for the Bureau of Labor.
We want another consumer expenditure survey.
For the most recent data, ever higher levels of consumption, not just to keep up with the Joneses but to surpass them.
Some food is consumed for the "Demographics" and then for self-preservation, some clothing is worn for warmth, and some housing is built for shelter.
The typical U.S. consumer has enough money to meet their basic needs.
Single women can spend a lot of money on clothes and pets, while men can spend a lot of money on entertainment, food, and drink.
Teenagers show off their wealth in purchases of electronics, cars, and clothes.
The conclusion is that young men spend 15 percent more at fast-food outlets.
Men spend 70 percent more on alcoholic beverages and young men spend less on smoking.
Young men have more money to spend on personal care items.
The Consumer Expendiment is more than the incomes of both sexes.
Sex doesn't spend much on charity, reading or health care.
Consumer patterns can be different by gender, age, and other characteristics.
Economists try to understand consumer behavior.
Teenagers spend over $200 billion a year.
Some items are shown here.
The first step in the consumption process is desire.
Producers won't give you their goods just to satisfy you.
They want money in exchange for their goods.
The desire is only one of the factors that affect demand.
Income, expectations, and other goods can affect whether a person will be willing to pay a certain price for a good.
The rest of the chapter looks at the factors of demand.
There is a simple starting point for an economic analysis of demand.
They don't look beneath the surface to see how the tastes came about.
Economists want to know how tastes affect consumption.
The first observation economists make is that the more pleasure a product gives us, the higher the price we'd be willing to pay for it.
If the oral sensation of buttered popcorn at the movies really turns you on, you're likely to pay a lot for it.
If you don't like popcorn, the theater might have to give it away.
A good or tion between total utility and marginal utility is what we make.
Diminishing Marginal Utility.
The thrill decreases with each mouthful.
Popcorn connoisseurs' behavior isn't abnormal.
As a rule, the amount of utility we get from a product decreases as we consume it.
The third slice of pizza isn't as good as the first, the sixth beer isn't as good as the fifth, and so on.
The phenomenon of diminishing marginal utility is so common that economists have created a law around it.
If the first box of popcorn was eaten last year, the second box may taste the same.
The law of diminishing marginal utility is applicable to short time periods.
Figure 20.2 shows how utility changes with the level of consump tion.
The total utility curve in Figure 20.2 is a little smaller each step.
The situation changes with the sixth box of popcorn.
The good sensations associated with popcorn consumption are forgotten when the sixth box arrives.
Dehydration takes over.
We had five boxes of popcorn and were happy.
If you ate six hamburgers, do Americans have a taste for that sensation?
Negative marginal utility is not always the end result of a good.
The first five boxes of popcorn contribute to the total utility curve.
Each step is smaller.
The law of diminishing marginal utility is reflected in this.
The curve is derived from the total utility.
The marginal utility is positive for the first five boxes.
We don't always buy what we want.
We have to settle for goods that yield less marginal utility simply because they are available at a lower price.
This explains why most people don't own a car.
The price of aPorsche is even greater than our desire to "taste" it.
The challenge for most of us is to reconcile our tastes with our bank balances.
As we consume more of a product, marginal utility is likely to diminish.
For the moment, assume that a person's tastes, incomes, and expectations are set in stone, and that the prices of other goods are also set.
It doesn't mean that other influences are changing.
We are focused on price in this case.
We want to know how much a consumer is willing to pay for another unit of a product.
When Apple launched the iPhone, Steve Jobs had to ask this question.
Consumers will be willing to pay for a product that delivers marginal utility.
The moviegoer may not be willing to pay more than 50 cents for the first ounce of buttered popcorn.
For a second pizza, sixth beer, and so forth, the same is true.
People are willing to buy more of a good if its price goes down.
As the marginal utility of a good decreases, so does our willingness to pay.
The explanations are reserved for psychiatrists, sociologists, and physiologists.
Our market behavior is described by the laws of economics.
Consumer behavior is explained by the theory of demand.
It's not helpful to the theater owner who is worried about popcorn sales.
Popcorn sales decline when prices increase.
Steve Jobs wanted to know the same thing.
The response of quantity to a change in price is the central question in these decisions.
The per centage change in quantity demanded divided by the percentage change in price is called quantity demanded divided by the percentage change in price.
When the price goes down, the quantity demanded goes up.
The price elasticity of demand can be summarized.
Take the percentage change in quantity into account.
The change in quantity demanded is 4 ounces - 2 ounces.
The computed percentage change will be affected by the choice of denominator.
The percentage change in quantity demanded can now be calculated.
When the price of popcorn was reduced, popcorn sales increased by an average of 67 percent.
The percentage change in price is the same as the percentage change in price.
The percentage price change is calculated by the average.
The price of popcorn went down.
The information we need to compute the price elasticity of demand is now available.
A useful number is what we get from all these calculations.
The consumer response to a price reduction will be large.
The quantity of popcorn will increase as the price falls.
The theater manager can lower the price of popcorn.
The consumer response is larger than the price change.
Take a look at the case of smoking.
Many smokers say they'd pay anything for a cigarette after they run out.
Table 20.1 shows that the price elasticity on smoking trends is only 0.4.
The quantity demanded would fall to zero.
There are two extremes to the law of demand for goods and services.
Raising cigarette prices can be used as a policy tool to curb teen smoking.
The drop in teen smoking is confirmation of this expectation.
The price elasticities are very different.
The smoking rate among youths in the United States rose from 1992 to 1997.
After declining for 15 years, starting in 1992.
The proportion of teenage smokers has risen by one least partially explainable by the first steep rise in cigarette third from its 1991 trough.
A price war between the tobacco companies in the 1990s caused a sharp decline in cigarette prices in the early 1990s, which is the main reason for the rise in youth smoking over youths and those with less-educated parents.
The price of cigarettes does not seem to deter young people from smoking.
The authors estimate that for every 10 percent decline in the price, are more experimental smokers.
The price elasticity of demand is what determines the effectiveness of higher cigarette prices.
Table 20.1 states that the demand for airline travel is more price-elastic.
The airlines get swamped with calls when a fare cut is announced.
The number of passengers may increase by as much as 60 percent if fares are discounted by 25 percent.
The elasticity of airline demand is shown in Table 20.1, which shows that the percentage change in quantity demanded will be larger than the price cut.
There are four factors that are worth noting.
Some goods are so important that they are considered "necessities".
A hair brush, toothpaste, and perhaps textbooks could be in this category.
Our taste for such goods is so strong that we can't imagine not having them.
Substitute goods affect our notion of which goods are necessities.
Consumers can always eat chicken, beef, or pork if fish prices go up.
Most bleary-eyed coffee drinkers can't imagine a substitute for a cup of coffee.
Consumers don't reduce their purchases very much when coffee prices go up.
The elasticity of demand for gasoline is low because most cars can't run on alternative fuels.
In 2002 New York City raised the price of cigarettes.
Good and legal sales of cigarettes in New York City fell dramatically after the introduction of a substitute substitute.
The price of the good in relation to a consumer's income is an important determinant of elasticity.
The nation's costliest smokes are in New York City.
The excise tax on internet from Indian reservations was raised from 8 cents to 16 cents.
They can buy cigarettes from a low-tax pack.
Together with states like Kentucky, Virginia, and North Carolina.
The price elasticity of demand for cigarettes in New York isn't related to the mat eral taxes.
The city was expected to make a lot of money from the tax on cigarettes.
After the "Bloom NYC", unit sales of NYC cigarettes plummeted by 44 percent.
He got a lesson in elasticity.
If demand iselastic, a price increase will cause a drop in unit sales.
Demand was highly price-elastic because of the ready availability of substitute products.
The demand for big-ticket items is elastic.
The demand for coffee is low at the moment.
Some people still drink coffee.
The quantity demanded would be more sensitive to price changes.
The current range of prices applies to the observation that the demand for coffee is price-inelastic.
The price elasticity of demand would go up if coffee prices went up dramatically.
The price elasticity of demand is affected by time.
When the price of gasoline goes up, car owners can't switch to electric autos.
For every 10 percent increase in price, the cigarette excise tax has been seized upon by President Clinton.
Professor Becker says that increasing fed is politically correct and reflects the first-year response to higher prices.
The federal government took in $12 billion in 1994.
If the tax were period, cigarette consumption is likely to decline by 8 percent, quadrupled to $1 a pack, and Clinton thinks tax revenues would for every 10 percent increase in price--twice as much as cli increase by more than $50 billion over three years.
They assumed it.
The $1-a-pack tax will help finance the health-care reforms less than President Clinton projected.
Gary Becker is a professor at the University of Chicago.
It takes time for people to change their behavior.
The short-run price elasticity of demand is lower than the long-run price elasticity.
Consumers can buy more fuel efficient cars with more time to adjust.
Gary Becker used the distinction between long-run and short-run elasticities to explain why a proposed increase in cigarette excise taxes wouldn't generate as much revenue as President Clinton expected.
Steve Jobs would have charged the initial price of $8,996.
This idea makes no sense in the case of completely inelastic demand.
Unit sales may be reduced by higher prices, but total sales revenue may be reduced as well.
If the price of popcorn is 40 cents per ounce and only 4 ounces are sold, total revenue is $1.60 per show.
The revenue is shown in a shaded area.
If demand iselastic, price hikes increase total revenue.
Change demand is not inelastic.
When the price of popcorn goes up, what happens to total revenue?
The law of demand states that an increase in price will lead to a decrease in demand.
We could raise popcorn prices from 40 cents to 45 cents.
4 ounces are sold for 40 cents per box and total revenue is $1.60 If we raise the price to 45 cents, only 2 ounces will be sold and revenue will go down to 90 cents.
The dashed rectangle shows the new and smaller total revenue.
Total revenue doesn't always suffer from price increases.
Table 20.2 summarizes the responses to price changes.
We can predict how consumers will respond to changing prices by knowing the price elasticity of demand.
When price is raised or reduced, we can predict what will happen to the total revenue of the seller.
The demand curve is shown in the bottom half of Figure 20.6 Few cigarettes are sold and revenue is low at high prices.
The law of demand continues to be increased by price cuts below $6 a pack.
The price reductions are not enough to offset the increase in unit sales.
After the price drops below $6 per pack, total revenue begins to fall.
Consumption behavior may respond to changes in other factors.
The price elasticity of demand shows the magnitude of that movement.
The demand curve changes when the underlying factors of demand change.
Consumer behavior is affected by these shifts.
The demand curve will change if there is a change in demand.
Consumers used to demand 12 ounces of popcorn at a price of 25 cents per ounce.
Changes in income can affect consumer demand for popcorn.
The graph in Figure 20.7 doesn't show how large the change in income was.
Figure 20.7 doesn't answer the questions.
The price elasticity of demand is similar.
Income elasticity is related to computing income.
If income increased from $110 per week to $120 per week, the shift in popcorn demand would occur.
Popcorn purchases can be affected by changes in income.
Popcorn sales increase by 28.6 percent when incomes rise.
Income and demand don't always move in the same direction.
People with low incomes buy discount clothes, used textbooks, and cheap beer.
They switch to designer clothes, new books, and premium beers when they have more money.
The income elasticity of demand is negative for inferior goods and positive for normal goods.
There are other forces that shift demand curves.
People have other options, such as candy, soda, and ice cream.
The prices of these other goods would fall.
Imagine a quarter price for candy bars, instead of the usual dollar.
Robin Gomes put her family on a budget last month and it was above the prior 12-month period.
It was bad news for restauranteurs.
Restaurant meals have been cut to once a taking a big hit under Upscale restaurants that thrived on corporate largesse.
The $258 billion restau --Shirley Leung rant and bar industry is grappling with its biggest slowdown in a decade as the shaky economy gives more consumers the jitters.
The sales Reproduced with permission of DOW JONES & COMPANY, INC. were higher than the previous year's format Textbook via Copyright Clearance Center.
The prices of other goods affect the initial demand for popcorn.
Other prices may change.
Consumers demand less popcorn at every price according to 2.
The price of good ure 20.8 shows the difference between substitute goods and complimentary goods.
This helps explain why we are in the U.S.
When the price of computer hardware drops, the demand for computer software increases.
Calculating cross-price elasticity.
The elasticity concept explains the relationship between the price of a good and the demand for it.
The denominator has not changed.
CD sales fell again in 2005, after a one-year gain.
They are 15.5% below their record level.
Digital track downloads increased from 150% to 352.7 million.
Digital downloads passed 1 billion units for the first time in 2004, and overall music purchases were up 22%.
Permission was granted for this article to be reproduced.
Demand for music CDs is affected by the price of downloads.
It's easy to substitute and differentiate between goods because of the cross-price elasticity of demand.
The cross-price elasticity is negative, meaning that a fall in the price of one leads to an increase in the demand for the other.
The decision to buy a single product has been the focus of our analysis so far.
When we go shopping, our concern isn't limited to how many good things we buy.