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CHAPTER 20 -- Part 2: CONSUMER DEMAND
We have to recognize that we have to give up the opportunity to buy more goods in order to get a single good.
If you have a $10 gift card, you can download music and video games.
You'll prefer the download that gives you the most satisfaction, according to the first proposition of consumer choice.
Market prices are taken into account in the second postulate of consumer choice.
Your budget may be able to win over you.
It's not irrational to download a song instead of a video game when you don't have a lot of money.
The best thing to do is to choose products that promise to provide the most pleasure for the amount of income available.
The marginal utility of the first video game is two times that of the first music download.
You should look at relative prices before you hit the keyboard.
This is not a good deal.
Some rich people drive a Ford rather than a shiny new Mercedes because of the same principle.
The marginal utility of driving a Mercedes is higher than the marginal utility of driving a Ford.
A rich person who drives a Ford must think that driving a Mercedes isn't as satisfying as driving a Ford.
The key to utility maximization is more than just buying the things you like best.
The most marginal utility per dollar is what the consumer should choose.
The principle of consumer choice is easy to understand.
You can spend the $10 gift card on music or game downloads.
As always, your goal is to get as much pleasure as possible from this limited income.
The question is how to do it.
The marginal utility of the first game is two times higher than the first song.
The second row of Table 20.3 shows this.
The first video game'sMU has been set at 20 units of utility.
We don't need to know if 20 Utils is a real thrill or just a bit of amusement.
The concept of "utils" is only a useful basis for comparison.
The first game'sMU was set at 20 Utils and the first song'sMU was 10 Utils.
The first game download is twice as satisfying as the first music download.
What happens to the sound of music?
The marginal utility of the first song is 10, but the second song has only 9.
You started with your favorite song, now you're working on your hits list.
By the time you get to a sixth song, music downloads aren't making you feel better.
You're tired of music by the tenth song.
The law of diminishing marginal utility applies to game downloads.
You want a high score in your favorite game.
The second game is enjoyable.
As you keep playing, frustration increases and marginal utility decreases.
By the time you play a sixth game, your nerves are pretty much over, and you only have 1 Util of marginal utility.
We can now determine how much to spend with these psychological insights.
Assessing the utility that maximizes the utility from available income is how we can start looking for the optimal mix of consumer purchases.
We could buy three games for $3 per play.
We would have enough change to download one song for a grand utility total of 64.
You could spend the entire gift card on music.
You could spend $10 and buy 10 songs.
This would only produce 47 Utils of total utility.
We don't have to make such extreme choices.
We can attain higher levels of total satisfaction because of this.
You can reach the peak of satisfaction by spending your $10 in 3 dollar installments.
If you spend it on one game, you'll get 20 Utils of satisfaction.
$3 will buy you your first three downloads.
The first song has anMU of 10 and the second song has anMU of 9.
By spending $3 on songs, you get 27 Utils of total utility.
It's your first purchase and it's superior to the pleasure of a first game.
You can spend the second $3 if you have downloaded three songs.
The first game, fourth, fifth, and sixth song are your choices.
The first unplayed game promises 20 pleasures.
The fourth song'sMU is 6.
There are only 5 Utils in the fifth song.
The fourth, fifth, and sixth songs will increase your utility by 15 Utils, whereas a first game will give you 20 Utils.
The second $3 should be spent on a game download.
The decision on how to spend the remaining four dollars is the same.
Either a second game (MU 18) or the fourth, fifth, and sixth songs (MU 15) is the final choice.
The second game has more marginal utility and is the correct decision.
You'll get two games and four songs after you work your way through the calculations.
The answer is yes.
The alternatives of spending $10 on songs alone, three games and a song are worse.
One you can find is P R O D U C T M A R K E T S.
There is a price of $3 for the first game from Table 20.3.
The first song has a marginal utility of 10 and a price of $1.
The first song is a better deal than the first game and should be purchased.
Optimal consumption means that the utility-maximizing combination of goods has been found.
You can't increase your utility by trading one for another.
Consumer choice is dependent on comparisons of marginal utilities and prices.
To use this principle, we need to know the amount of utility available from various goods and be able to perform a little calculation.
We can get the most satisfaction from our limited income by doing so.
Consumer choice looks dull and mechanical because of these graphs and equations.
According to economic theory, consumers walk through shopping malls with marginal-utility tables and hand-held computers.
No one does this, not even your economics instructor.
Economic theory is good at predicting consumer decisions.
With limited income, consumers don't always buy the best mix of goods and services.
Consumers adjust their behavior after some trial and error.
T H E E C O N O M Y T O M O R R O W is paid over $35 million a year to help convince us to drink Powerade and wear Nike shoes.
In 2007, he started talking about Microsoft's operating system.
The companies that sponsor James don't agree with the assumption.
They think your tastes will follow him.
Another big endorsement deal has been signed by King James.
Since May, when he signed a seven-year, $90 million deal with Nike, James has signed four-year, $5 million tracts with sponsors.
Like his hero, Michael Jordan, the 19-year-old James chews and sometimes blows a bubble.
James signed a three-year, $13 million deal with the Cleveland Indians, making him a natural fit for London-based Cadbury.
According to his agent, he will have a James-inspired flavor.
The Associated Press was printed with permis or five companies, including McDonald's.
Companies pay huge amounts for celebrity endorsements in order to change consumer tastes.
One of the highest per capita advertising rates in the world can be found in the United States.
Some of the advertising is intended to give information about existing products or to introduce new products to our attention.
Advertising is designed to exploit our senses and lack of knowledge.
Advertisers promise exoneration, recognition, and love, all they have to do is buy the right product.
Our sense of security is a favorite target of advertisers.
Thousands of products are marketed in ways that appeal to us.
If I drink the same soda as James, I will be a winner.
I will be able to jump 8 feet high if I wear Air Zoom shoes.
Advertising isn't to blame for our foolish consumption.
The members of the most primitive tribes were adorned with rings, bracelets, and pendants.
Advertising has grown to massive proportions only in the past 50 years, but consumption spending has increased throughout recorded history.
A lot of advertising doesn't change buying decisions.
It's not a good idea to attribute the growth or content of consumption to the advertisers.
This isn't to say that advertising makes us happy.
Advertising is meant to change the choices we make.
Product images are used to attract us to particular products, so are pictures of hungry, ill-clothed children used to persuade us to give money to charity.
Public relations ploys are used to sway our votes for public servants.
In the case of consumer products, advertising seeks to increase tastes for particular goods and services and there is our willingness to pay.
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Producers want to change consumer tastes.
Advertising is likely to play a bigger role in consumption decisions at higher incomes.
The demand curve may be less elastic as a result of advertising.
The consumption choices we make in the economy tomorrow will be influenced by advertising.
The demand curve is buying.
Income elasticity of demand is a measure of the response to a good at different prices.
The product is a normal good if the marginal utility is taken into account.
If there is demand for more units of a good.
When income rises, it's an inferior law of diminishing marginal utility that says that the more of a good.
We tend to derive from additional units of demand when we measure cross-price elasticity.
It's a good thing to change the price of another.
The price elasticity of demand is a numerical measure.
When choosing between alternative goods and services, a percentage change in quantity demanded is used to compare the prices and anticipated satisfac.
They offer elasticity tions.
To maximize utility with one's avail depends on the relative price of a good, the availability of able income, and time.
The effect of a price change on revenue depends on how much was spent.
The price elasticity and relative prices must be compared.
Advertising seeks to change consumer tastes and thus depends on a consumer's income, tastes, expectations and willingness to buy.
The price and availability of other goods can change if tastes do change.
Will shift for that product.
The price elasticity of demand is different for teen 3.
Would you like the 4 if you owned a movie theater?
If the demand for coffee is low.
There is a demand for New York City cigarettes.
There are numerical and graphing problems in the Student Problem Set at the back of the book.
A consumer's demand for any specific product is an expression of many forces.
The quantity of a product demanded by a consumer varies with the price.
Economic theory tries to show how the forces affect consumer demand.
We've used two-dimensional demand curves to show the basic principles of demand.
A change in the price of a good causes a movement along the demand curve, while a change in tastes, income, expectations, or other goods causes the entire demand curve to change.
We have not looked at the origins of demand curves.
The demand curve shifts in response to changes in tastes, income, expectations, or other goods.
It is possible to derive a demand curve without observing consumer behavior.
The demand curve is developed from known preferences rather than market observations.
If consumers' behavior in product markets is consistent with their preferences, the demand curve will be the same.
The difference curves are used to show consumer tastes.
We look at their construction and use in this appendix.
indifference curves provide an explicit basis for constructing a demand curve.
They show how consumption is affected by price, tastes, and income.
The decision to purchase one good rather than another is called that.
You have to make difficult decisions because of the income constraint.
When the game is changed, compare their prices, then make a selection.
With careful total utility obtained, you could choose the optimal mix of Cokes and video with one additional unit of a good or service.
It is possible that different combinations of two goods are equally satisfying.
The consumer won't care which of the three combinations he or she gets.
The marginal that maximizes the utility from available income is difficult to calculate.
The first music download had a marginal utility of 10, while the first game download had a marginal utility of 20.
We had to specify the marginal utility of every download.
A bit less calculation is required for indifference curves.
We now look for combinations of goods that yield equal satisfaction instead of trying to measure the marginal utility of each prospective purchase.
Different combinations of Cokes and games are required in the arcade.
We need to find out if one particular combination of Cokes and video games is as satisfying as another.
We don't have to say how many units of pleasure the combinations give, it's enough that they're both equally satisfying.
It's possible to find other combinations of equal satisfaction.
We decided that 2 Cokes and 5 video games would be just as satisfying as 1 Coke and 8 games.
A third combination of Cokes and video games is as satisfying as the first.
Figure 20A.1 shows the information we've gathered.
A consumer choice of goods that yield equal satisfaction would be just as happy with any combination represented on the curve.
It would be better if there were only 1 Coke and 8 games.
There are some combinations that are less satisfying.
A map depicts all the combinations of goods that would yield different levels of satis tions.
A single indifference curve shows all combinations that provide the same level of utility.
Consumers strive to maximize their utility.
They want as much satisfaction as they can get.
The indifference curve farthest from the origin is what this means in the terminology of indifference curves.
The greater the total utility, the farther one is from the origin.
The Price of 50C/ per Coke is available by income.
The goal of consumers is obvious, but the means of achieving it are not.
The higher indifference curves are more expensive.
There is a conflict between preferences and prices.
We can't attain infinite satisfaction with a limited amount of income.
An indifference curve closer to the origin is what we have to settle for.
We have to figure out how much we have to spend.
For the moment, Cokes and video games are the only things we want to spend our money on.
The price of a Coke is 50 cents, while the price of a game is 25 cents.
If we didn't play any video games, the maximum number of Cokes we could buy would be 4.
If we were to abandon Coke, we could play as many as 8 games.
The limitations on our consumption possibilities are depicted in Figure 20A.3.
The budget line shows the combinations of Cokes and video games that can be purchased with $2.
The budget line is easy to draw.
Dividing one's income by the price of the good on the corresponding axis shows the end points of the budget constraint.
The curve begins at 4 Cokes and ends at 8 games.
There are other combinations of Cokes and video games that could be purchased with $2.
Figure 20A.3 shows a smaller income.
We could afford fewer Cokes and games if we only spent $1.
A budget constraint that lies closer to the origin represents a smaller income.
The limitation on utility maximization can be seen as a budget constraint looms.
We want to reach the highest indifference curve possible.
Our limited income makes it hard for us to grasp.
We can only go as far as our budget allows.
The process of achieving optimal consumption is shown in Figure 20A.4.
The indifference map depicts all utility levels and product combinations.
The budget line reflects our income.
We assume Coke costs 50 cents, video games cost 25 cents, and we have $2 to spend.
The combination that yields less total utility falls on a lower indifference curve.
If we want to maximize the utility of our limited income, we should buy this combination.
The utility-maximizing rule requires a comparison of the ratios of marginal utilities to prices.
When consumption is optimal, the relative marginal utilities of Cokes and video games should equal their relative prices.
If a Coke costs twice as much as a video game, then it must yield twice as much marginal utility if the consumer is in an optimal state.
Coke substitution for video games would be desirable.
The budget constraint is determined by the relative prices of Cokes and video games.
The slope is the price of video games divided by the price of Cokes.
Video games can be exchanged for cokes at a certain rate.
One video game is worth half a Coke.
The slope of the indiffer shows the relative marginal utilities of the two goods.
The curve tells you what rate a consumer is willing to substitute one for another; the relative mar good for another, with no change in total utility.
It's the same as the relative marginal utilities of the two goods.
If the third Coke were as satisfying as the fifth video game, one would be indifferent to a choice between 2 Cokes + 5 games and 3 Cokes + 4 games.
indifference curves and marginal utility comparisons lead to the same optimal mix of consumption.
In Figure 20A.5 we can see what happens.
We're going to change the price of video games to see how consumption changes.
The budget constraint will be shifted inward by this change, as our income of $2 now buys a maximum of 4 games rather than 8.
In Figure 20A.5 there is only one change to the budget constraint.
The budget line starts at 4 Cokes because the price is the same.
Only one end of the budget constraint is shifted if only one price is changed.
The price of two Cokes and 4 games has gone up to more than $2.
We have to accept a lower level of total utility.
The point of tangency is between the new budget constraint and the lower indifference curve.
The price of video games has gone up and the amount of games demanded has gone down.
The kind of relationship that demand curves describe is this one.
The price of video games is changing.
The quantity demanded falls as the price of games increased.
The price of video games would fall.
If the price of a game fell to 10 cents, the time period would increase.
We can now buy more goods because of the price reduction.
We consume 8 video games and 2.4 Cokes at these prices.
When the price of video games goes down, the quantity demanded increases.
The information in Figure 20A.6 is about the demand for video games.
The demand curve generalizes the observations.
We end up with a demand curve that is derived from our knowledge of consumer tastes.
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