University:
California State University, Northridge
Course:
ECON 409 | Introduction to Econometrics
Academic year:

2022
Views:

203

Pages:

2
Author:

sonalhava9qv

- - - - - - Utility and consumer decision making - Assume that consumers are rational - They make choices intending to make themselves as well-off as possible - Having limited resources, people must make decisions as to what to consume - Utility - Enjoyment or satisfaction that people obtain from consuming goods and services - Measured by economists in utils - Total utility - The total possible enjoyment/satisfaction that’s derived from consumption of a good or service - Marginal utility - Amount by which total utility would change when consuming an extra unit of a good or service Diminishing marginal utility - Consumers experience diminishing additional satisfaction as they consume more and more of a good or service during a given period of time - The first items consumed produce the highest marginal utility, so subsequent items consumed give diminishing marginal utility Budget constraints and buying decisions - Budget constraint - The limited amount of income available to consumers to spend on goods and services; they need to figure out how much of each item to purchase - Marginal utility per dollar spent - MU / price - This will enable comparisons so a consumer can make choices on how to spend money to maximize utility - Equal marginal utility per dollar spent - Consumers should seek to equalize their bang for the buck Conditions for maximizing utility - Satisfy rule of equal marginal utility per dollar spent - Exhaust your budget What if prices change - Goes down: - Consumer can afford more than before - Income effect - Good becomes cheaper than other things - Substitution effect Income effect - The change in quantity demanded of a good that results from a change in price on consumer purchasing power, holding all other factors constant - Normal goods - Consume more of as income increases - Inferior goods - - - - - Consume less of as income rises Substitution effect - Change in quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding all other factors constant Behavioral economics - The study of situations in which people make choices that don’t appear to be economically rational - 3 common mistakes - Taking into account monetary costs but ignoring nonmonetary opportunity costs - Endowment effect - Tendency of people to be unwilling to sell a good they already own, even if they’re offered a price that’s greater than the price they’d be willing to pay for it if they didn’t own it - Failing to ignore sunk costs - Sunk cost - A cost that has already been paid and can’t be recovered - People often allow past costs to influence future decisions - Being unrealistic about their own future behavior - Short-run preferences are often not consistent with long-run preferences Nudges - Nudging - Using behavioral economics to change people’s behavior to make better choices - Subtle manipulations - Used to generate socially better outcomes - Done on basis that people stick with default option - Done in a way so that people are unaware of being manipulated: no bullying or coercion Behavioral economics in shopping - Rules of thumb - Making general rules that often, but not always, produce optimal results - This can save on decision-making time but can also have bad outcomes - Anchoring - Irrelevant information shown to consumer can often influence behavior

Utility and Consumer Decision Making

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