Consumer Behavior and Demand Theory
Objectives of this Chapter
In Chapter 1, the demand curve helped us examine how consumers decide how much of a
good to purchase.
In this chapter, we look at the demand curve in depth, and use it to continue to
explore how consumers behave.
In particular, we’ll see how prices and income interact with
consumers’ preferences to determine consumer choice.
Along the way, we will discover:
How consumers choose the combinations of good that they like best from the
combinations they can afford.
What factors affect consumers’ preferences for goods.
How economists identify the different combinations of goods a consumer can afford.
How changes in preference, price, price of related goods, and income can affect a
consumer’s consumption habits.
How energy usage is influenced by demand.
Importance of electricity in generating greenhouse gases
The electricity generation industry in the US is a major source of emissions.
In 2003 the
industry generated 3.223 million megawatt hours and emitted 2.408 billion metric tons of carbon
, which contributes to climate change) and 10.594 million metric tons of sulfur
dioxide (a source of acid deposition).
Electricity is produced from many fuels.
for 51% of the energy, nuclear 20%, natural gas 17%, hydropower 7%, and the remainder comes
from petroleum and other fuels.
Every one of these fuel sources has associated environmental
Burning coal produces CO
, sulfur dioxide, nitrogen oxides, and other toxics,
including mercury (which can cause nerve damage).
Mining coal consumes land.
from dams, comes at the expense of free flowing streams and their fisheries and is particularly
hard on salmonids.
Nuclear power carries a small probability of accidents, including
catastrophic accidents like Chernobyl (which spread a cloud of radioactive material around the
world and created a highly hazardous zone around the reactor).
Disposal of used fuel is difficult
because the waste is hazardous for a very long time.
And the operation of a reactor can be a
threat for nuclear weapons proliferation.
There is no electricity generation method currently in
large scale use that does not have adverse environmental consequences.
While the U.S. Clean Air Act has controlled the quantity of sulfur dioxide and nitrogen
oxides from the electric power industry, the perceived need to control carbon emissions is of
much more recent origin.
Carbon dioxide is one of a number of gases that, as they accumulate in
the atmosphere, help to trap heat from the sun instead of allowing it to re-radiate to outer space,
much as a greenhouse traps heat in the winter.
While the earth would not be habitable without
this warming effect, increases in greenhouse gas concentrations in the atmosphere are leading to
changes in the planet’s climate, sometimes termed “global warming” or “climate change.”
developed countries (with the notably exception of the US) are signatories to the Kyoto Treaty,
whose purpose is to reduce the emissions of carbon.