17 -- Part 3: Behavioral Economics and Risk Taking
Consumer behavior can be affected by price changes.
The marginal utility per dollar spent will go up if the price goes down.
The product that has become less expensive will be replaced by another product.
The substitution effect is what this is.
The real- income effect is when the lower price causes an increase in purchasing power.
Water is inexpensive because it is essential to life, while diamonds are expensive because they do not sustain life.
The paradoxes of Adam Smith's era were puzzling to many people.
The price of water is low because its supply is plentiful, and the price of diamonds is high because their supply is small.
The price of water would be more expensive than the price of diamonds.
Finding your soul mate can make you both want to work to support your lifestyle more than anything else.
We give economic advice about love and marriage, which is time and energy well spent.
The one who is willing to enter into a binding contract market doesn't use money, so all you need to do is find some made in a market.
It uses barter.
You find a person who feels the same way about you.
When partners have different skills and characteristics, partnerships work best.
One person is in charge of finances, the other is in charge of the yard.
A couple can make gains from trade by using their comparative advantage in the production of household services.
There is a strong relationship between consumption complementarities.
You've found someone special when you do things together.
Taking walks, having a common passion for animals, and belonging to the same religious organization are some of the activities that can be done together.
A beneficial partnership is more than just getting more done.
It's about having more fun because each partner enjoys life more when the other is around.
Think of a business contract between two people about how they will organize their lives together when you think of marriage.
Do you suppose this couple has found a contract with their consumer?
Both indicate that you liked it.
If you offer 50% off on the first pizza but don't offer it again, you have a budget of $8 and cookies and pizza.
Explain that the pretzels cost $1 each.
The pricing strategy of the consumer taurant.
The optimum price for cashews is $6 per sumer if the price of cookies goes up.
For $2 per slice, fill in the missing information in the table at the pizzeria.
If you and your friends want to go on a vacation, you can either go to Cabo San Lucas or Mexico for spring break.
The answer was $1,000 to each destination.
Most people don't wear ties, but you expect to see a difference in pain relief.
Real prices are high, that's the key to answering this question.
Underwear is similar to water in that the data are expressed in total Utils.
The first taco has 10 Utils.
It does not mean that ties are more valuable than the second taco.
There are less extras to society.
People get more marginal Utils from the second taco than they do from the first taco because they get the "Perfect" tie instead of the "Perfect" underwear.
In their daily lives, demand is only half of the curse.
The other half of the equation is supply.
Ties are more pain relief than underwear.
The lives of those who cursed in their daily ties were not spared from the pain of price.
Ties are a fashion statement.
When ties are a luxury good, this result is not surprising.
There is a law of diminishing marginal utility.
There is a small overall market for diamonds.
The simple supply and demand model can't capture everything.
The tool of indifference curve analysis was used to explore the question.
The purpose of this appendix is to get you thinking about the connections between price changes and consumption decisions.
When consumers make decisions, economists use differences curves to describe the trade offs.
The simplest way to think about indifference curves is to imagine a topographical map with each level of personal line representing a specific elevation.
When you look at a map.
This book is a two-dimensional space that we use to illustrate the most utility, which is the only limitation of this combination of two goods analysis.
The maximization point is where total utility is the highest.
Remember that you had $10 to spend and only two items to purchase: pizza at $2 per slice and a can of soda for $1.
If you maximize the marginal utility per dollar spent, you'll be able to get four Pepsis and three slices of pizza.
We'll start with another question to answer the question we just posed.
This may seem odd, but think about your own consumption habits.
We all stop eating and drinking at some point.
The lines of equal satisfaction are represented by the indifference curve.
The indifference curve is shown in Figure 16A.1 as circles around the point of maximum satisfaction.
The closer the indifference curve is to the maximization point, the higher the consumer's level of satisfaction.
The difference curves can be seen as approaching the maximization point from all directions.
Some paths are better than others.
Only one path makes sense.
Pizza orPepsi are either bad or good in quadrants II, III, and IV because they make the consumer feel too full or sick.
The maximization point shows where a consumer gets the most use.
If you want to maximize utility, you need to attain more of both pizza and Pepsi because they are both good.
Pizza andPepsi are either bad or good in quadrants II, III, and IV because they make the consumer feel too full or sick.
The most affordable path to the highest utility is quadrant I because the consumer has to pay to get pizza andPepsi, and at least one of the items is reducing the consumer's utility.
People aren't likely to choose an option that makes them feel too full or sick, so Quadrants II, III, and IV are highlighted in orange.
quadrant I is the preferred path to the highest utility.
Increasing the amount of pizza andPepsi will produce more utility.
We need to account for a person's budget and cost in real life.
If you have that amount of money to spend on pizza, you can choose how much you want the consumer to pay for 10 cans of Pepsi.
You could afford it.
In Chapter 16 we saw a number of different combinations of pizza and Pepsi.
There are many affordable combinations of the two goods.
First, let's take the pairs along the budget line.
If you spend $10 on a can of soda, the coordinates are 10,0, which represents 10 cans of soda and 0 slices of pizza.
The coordinates are (0,5) if you spend your entire budget on pizza.
We can see the many combinations that would exhaust $10 by connecting these two points with a line.
If you have a budget, your goal is to pick the combination that maximizes your satisfaction.
One way to maximize utility is to spend $10 on four cans of Pepsi and three slices of pizza, which is the point of utility maximization we discovered in the chapter.
Spending the leftover money in your budget will increase your satisfaction.
The combination is a failure to maximize utility.
The point is on the other side of the budget constraint line.
This is a combination of items that you can't afford.
The budget constraint is a limiting set of choices or a constraint imposed by scarcity.
indifference curves are examined in greater detail in the next section.
We can join the budget constraint to better describe how consumers make choices once we understand the properties of indifference curves.
It is important to keep in mind the assumptions about indifference curves.
Our model is logically consistent because of the properties described in this section.
The lower indifference curves are preferred to the higher ones within that quadrant.
No rational consumer would ever operate in these regions because of quadrants II through IV.
The indifference curve shows the trade off between two goods.
The slope of the indifference curve in the figure is reflected in the MRS.
Points A and B are willing to trade one good for another along the same indifference curve, so the consumer finds the combinations.
The consumer needs to get two slices of pizza between points A and B to make up for the loss of a can.
The figure shows that the consumer chooses only two cans of soda and three slices of pizza.
The marginal rate of substitution is -2.
The indifference curve between points C and D shows that the consumer is indifferent between the combinations.
The MRS is -4 because the consumer is willing to give up four cans of soda to get one more slice of pizza.
The consumer has a lot of pizza, but very littlePepsi.
The consumer has two cans.
The consumer starts with two slices of pizza, which is more valuable than points C and D. When giving up another good that is in short supply, it takes more of the plentiful good to keep the consumer indifferent.
The property of indifference curves is that they can't be thick.
If they were thick, it would be possible to draw two points inside an indifference curve where one of the two points was preferred to the other.
Both points B and C are preferred to point A.
Because point B has one more slice of pizza than point A, and point C has two more cans of soda than point A.
The consumer cannot be indifferent between these three points because they add to the consumer's utility.
By their nature, difference curves cannot intersect.
Let's look at a hypothetical case to understand why.
We know that points A and B bring the consumer the same utility because they are located along the light orange curve.
The same utility can be found at points A and C, which are located along the darker orange curve.
The utility at point A is equal to the utility at point B and the utility at point C is equal to the utility at point C.
There are two points, point B and point C. Point C is preferred to point B because (2,4) dominates (1,3).
indifference curves cannot intersect without violating the assumption that consumers are rational utility maximizers.
indifference curves are bowed inward toward the origin and cannot be thick.