A consumer could choose between a donut with its immediate taste and sugar sensations and an apple with its contribution to future health.
The act of consumption involves a choice of spending money now or saving for the future.
Scientists are studying the mental processes involved in self-control.
It is possible that suppressing the urge to use a curse word strengthens our self-control systems in the same way that jumping jacks strengthen our muscles.
Calisthenics build up our muscles for more important tasks.
Sub jects were told to sit up straight in one experiment.
The subjects boosted their strength and endurance by doing things that had nothing to do with posture.
The equimarginal principle can be applied to consumer choice by applying the insights from neuroscience.
The Neuroscience of Consumer aims to study more efficiently.
The economic logic behind the law of demand is provided by the theory of consumer choice.
The theory says that consumers maximize their level of satisfaction, or utility, if they can't afford it because of their income and prices.
The best affordable choice for a consumer at a particular price is represented by every point on the demand curve.
Traditional utility theory is used in the first two parts of the chapter.
If the benefit exceeds the cost, taking an action is sensible under the framework developed by Jeremy Bentham and John Stuart Mill.
If the marginal benefit exceeds the marginal cost, a consumer will buy a product.
The law of demand and the negatively sloped demand curve are explained in this logic.
There is a self-contained treatment of traditional consumer choice and demand theory in the first two parts of the chapter.
It is possible to stop at the end of the second part and still get a good understanding of consumer decision making and the law of demand.
Without loss of continuity, the third and fourth parts of the chapter can be skipped.
Recent advances in neuroscience are relevant to consumer decision making in the third part of the chapter.
In the last few decades, neuroscience has explored the brain activity associated with making decisions, and can now measure the neural activity involved in consumer choice.
The benefit and cost of consuming a product are represented by neural activity.
If the benefit activity is stronger than the cost activity, a consumer is more likely to buy the product.
Consumers base their decisions on the benefits and costs of a product.
Some day it will be possible to measure the utility associated with consuming a product.
The model of consumer choice is integrated into the fourth part of the chapter.
The integrated model can be used to address the questions.
Consumer behavior is explained by the lessons from neuroscience.
We can use neuroscience to identify strategies to change consumer behavior, such as eating fewer donuts, saving more money, and quitting smoking.
A consumer with a fixed budget can spend on movies and books.
The consumer wants to maximize its level of satisfaction, subject to budget constraints.
The consumer wants to find the best deals on movies and books.
A consumer's ability to purchase movies and other goods is limited by her income and the prices of movies and other products.
She spends $27 per month on movies and books.
The price of books is $1 and the price of movies is $3.
A budget line shows the combinations of two goods that exhaust the budget.
The points between the two extremes are1-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-65561-6556
The opportunity cost of a movie in terms of books is the slope of the budget line.
The slope is the ratio of the price of the good shown on the horizontal axis to the price of the good shown on the vertical axis.
A movie is three times more expensive than a book, so the opportunity cost of a movie is the three books that could be purchased instead.
A budget set is a combination of two goods.
The budget line--combinations that exhaust the budget--as well as combinations that cost less than the consumer has to spend, leaves the consumer with leftover money.
She cannot afford combinations above the budget line.
The budget line is different from the demand curve.
The budget line is very different from a consumer's demand curve.
The budget line shows how much a consumer can spend on two items.
The demand curve shows the quantity of a single good that a consumer is willing to pay different prices for.
The consumer wants to maximize its utility.
Utility increases as the number of movies increases.
The utility will increase at a decreasing rate as the number of movies increases.
The law of diminishing marginal utility is reflected in the shapes of the utility curves.
The idea is that the first unit of a product creates more satisfaction than the second unit and so on.
The slope of the total utility curve decreases as the number of movies increases.
By the law of diminishing marginal utility, the slope of the marginal utility curve is negatively sloped.
One more curve will be useful.
The marginal utility per dollar on movies is shown by the lower curve.
The marginal utility per dollar spent on movies is 36.
Each dollar spent on a movie increases the consumer's utility by 12 Utils.
The marginal bang per buck is the increase in consumer utility.
The law of diminishing marginal utility causes the marginal bang per buck to decrease from 12 to 9.
The marginal utility of movies decreases as the number of movies increases, reflecting the assumption of diminishing marginal utility.
The marginal principle can be used to model the consumer's decision about how to spend their money.
If the marginal benefit exceeds the marginal cost, increase the level of the activity.
The marginal benefit is equal to the marginal cost.
To maximize utility, a consumer picks the quantity of a product at which the mar ginal benefit of the product equals its marginal cost.
The marginal benefit is the utility generated by a movie.
As the num ber of movies increases, the marginal benefit decreases.
The cost of consuming a product should be considered next.
The principle of opportunity cost is used to calculate the marginal cost of a movie.
The sacrifice you make to get something is the opportunity cost.
The opportunity cost of a movie is sacrificed by getting one movie instead of many books for a consumer who buys movies and books.
The number of books sacrificed per movie is determined by the prices of the goods.
The consumer has to sacrifice three books per movie because movies are three times more expensive than books.
If the price ratio is 3 and the marginal utility of a book is 12 Utils, the marginal cost of a movie is three books sacrificed per movie times the 12 Utils lost per book not purchased, or 36 Utils.
The marginal benefit of movies is equal to the mar ginal cost.
We can change this in a more convenient way.
To satisfy the marginal principle, a consumer chooses the quantities of movies and books that have the same marginal utility per dollar spent.
The marginal benefit per dollar for the first activity is the same as the marginal benefit per dollar for the second activity.
The consumer chooses the amount of movies and books that have a marginal bang per buck and the same marginal utility per dollar.
The consumer wants to maximize the utility generated by a fixed budget.
The bundle of goods must satisfy two conditions to be maximized.
The marginal utility per dollar on movies is the same as the marginal utility per dollar on books.
The budget for the two goods is fixed and the money spent on the two goods adds up to it.
The consumer chooses the bundle that complies with the equimar ginal rule.
A consumer with a budget of $27 for movies and books can see utility maximization.
The marginal utility per dollar is shown on the left panel.
The marginal utility per dollar on books is shown in the right panel.
The marginal utility per dollar on movies is equal to the marginal utility per dollar on books under the Equimarginal Rule.
The consumer can do better by reallocating the budget in favor of the good with the larger marginal utility per dollar.
Each good has a marginal utility per dollar.
The consumer spends a total of $27 on movies and books.
The bundle is affordable and has the highest affordable utility level.
When the equimarginal rule is violated, we can show what happens.
The marginal utility per dollar for movies is greater than the marginal utility per dollar for books.
The marginal utility per dollar of books is affected by movies, so the consumer's utility increases.
If the equimarginal rule is violated, the consumer can increase utility by shifting the budget to the good with the larger marginal bang per buck.
There is a detailed view of the utility-maximization process in Table 22.1 The marginal utility numbers are shown in columns 3 and 4.
The law of diminishing marginal utility states that the marginal utility of movies decreases as the number of movies increases.
The number of affordable books decreases as we move down the table, so the marginal utility of books increases.
The marginal utility per dollar for movies and books is shown in columns 5 and 6.
The marginal bang per buck of movies decreases as we move down the table, while the marginal bang per buck of books increases.
When the equimarginal rule is satisfied, utility is maximized.
We work from the bottom up to put the numbers in Column 8.
For the first three books, the marginal utility per book is 16 Utils, so the utility from the first three books is 48 Utils.
The utility from six books is 90 Utils (48 + 42) because of the additional Util ity from the next trio of books.
In Column 8, the utility from books goes up to 126 Utils for nine books, 156 for 12 books, and so on.
When we reach a total of 387 Utils with the bundle of six movies and nine books, the total utility will increase from 267 to 51 + 216.
When the equimarginal rule is satisfied, the marginal utility per dollar of movies is equal to the marginal utility per dollar of books.
The subjective benefit increased at a decreasing rate as the monetary reward increased.
The marginal utility was only 0.25 Utils per dollar when the reward was $150.
This experiment does not show the law of diminishing marginal utility for a particular product, but it does show that general neuroscience has used brain scans to provide rewards that are subject to diminishing marginal utility.
The income and substitution effects of a price change can be demonstrated with our model of consumer choice.
The substitution effect and income effect are the effects of a change in price.
The price of movies would go from $3 to $2.
The original bundle is in violation of the equimarginal rule because of the decrease in the price of movies.
The rational consumer will reallocate their budget to movies because of the larger marginal bang per buck.
The consumer obeys the law of demand when there is a decrease in the price of movies.
The two conditions for maximization were satisfied by this bundle.
Each good has a marginal utility per dollar.
The consumer spends a total of $27 on movies and books.
A decrease in the movie price from $3 to $2 increases the number of movies demanded from 6 to 10, consistent with the law of demand.
The marginal bang-per-buck curve is shifted downward by an increase in price.
The marginal bang per buck of movies will be less than the marginal bang per buck of books.
The law of demand states that an increase in price decreases the quantity of movies demanded.
A decrease in the price of movies will increase the number of movies and shift the movie benefit curve upward.
A decrease in price increases the amount of movies demanded.
There is an increase in the quantity demanded.
The substitution effect is the first.
A decrease in the price of movies leads to the consumer substituting movies for books.
A simple thought experiment can show the substitution effect.
When the price of movies goes from $3 to $2, the consumer's nominal income goes from $27 to $21.
The consumer's nominal income goes down by $6, leaving just enough money to afford the original bundle of six movies and nine books.
The consumer's real income hasn't changed because of the $6 decrease in nominal income offset by the price reduction.
The $21 budget will be reallocated to movies.
The consumer has to sacrifice two books for each additional movie because the new movie price is twice the book price.
Until the equimarginal rule is satisfied, the consumer will shift money to movies at a 2:1 rate.
By keeping the consumer's real income constant, movie consumption increases from six to eight movies.
The substitution effect isn't the end of the consumer response to a price decrease.
The income effect is the second response.
A decrease in the price of movies will increase the consumer's real income and cause them to buy more goods and services.
The substitution effect cut nominal income by $6 to keep real income constant.
We can show the income effect of a decrease in price by undoing the $6 cut in nominal income.
We give back the $6 and see how the consumer responds.