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Unformatted text preview: Chapter 3: Consumer Behavior PART II PRODUCERS, CONSUMERS, AND COMPETITIVE MARKETS CHAPTER 3 CONSUMER BEHAVIOR TEACHING NOTES Now we step back from supply and demand analysis to gain a deeper understanding of what lies behind the supply and demand curves. It will help students understand where the course is heading if you explain that this chapter builds the foundation for deriving demand curves in Chapter 4, and that you will do the same for supply curves later in the course (beginning in Chapter 6). It is important to explain that economists approach behavior somewhat differently than, say, psychologists. We take preferences to be given and dont question how they came to be. Psychologists, on the other hand, are interested in how preferences are formed and how and why they change, among other things. Economists usually assume consumers are rational, while psychologists explore alternative explanations for behavior. It is very useful to describe what we mean by rational, because that term is often misunderstood. We mean that people have goals, and they make decisions that will enable them to achieve those goals. Rational does not mean that the goals are somehow rational or appropriate, nor does it mean that people do what others might think is right or best for them. Economists generally assume that consumers want to maximize their happiness or satisfaction (i.e., utility), and as long as consumers are making decisions that achieve that goal, they are being rational. If someone who absolutely loves fast cars buys an expensive Porsche and consequently lives in a dump, wears worn-out clothes and eats poorly, he is being completely rational if that is what makes him most happy. Students sometimes think that economists view people as being self-centered and concerned only with themselves. This is not necessarily the case. A consumers utility can depend on other consumers purchases or well-being in either a positive or negative way. I had a colleague once who taught Sunday school and said, somewhat jokingly, that it was all just a matter of interdependent utility functions. You can come back to this issue when covering the material on network externalities in Section 4.5 of Chapter 4 if you wish. Many students find the consumer behavior material to be highly theoretical and not very realistic. I like to use Milton Friedmans billiards player example to illustrate that theories do not have to be realistic to be useful....
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