2023Ch7SumMcBr - Consumer Behavior Chapter 7 Outline...

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Consumer Behavior Chapter 7
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Outline Consumer choice and the law of demand Substitution effect of price change Income effect of a price change Utility Diminishing marginal utility Marginal utility and the demand curve Decision-making using price and marginal utility Comparing utility per dollar Consumer equilibrium Consumer surplus
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Consumer choice and the law of demand Price is a key determinant in consumer choice and decision-making. According to the “law of demand,” as the price of a product decreases, quantity demanded tends to increase; and when the price of a product increases, quantity demanded tends to decrease. What is the rationale for this law? The purpose of this chapter is to look at the reasons behind the “law of demand,” especially utility theory. More specifically, we will examine the substitution effect of a price change, the income effect of a price change, and the principle of diminishing marginal utility. The concepts of consumer equilibrium (in relation to utility theory) and consumer surplus will also be addressed.
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Substitution effect of a price change Most products have substitutes. In some cases, many, while in other cases, few. But as long as there is at least one substitute for a product, the law of demand must be true. If the price of beef increases, for example, you can always substitute chicken, pork or fish for the now more expensive beef. Likewise, if the price of beef decreases, you can substitute beef for chicken, pork or fish. Some products are the exception to the rule, such as with insulin for a diabetic. Price is not a factor and demand is perfectly inelastic. But very few products are in this category. With almost all products, demand in downward sloping because you have choices and substitutes available.
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Income effect of a price change The law of demand focuses in on price and how it affects quantity demanded, but with other variables held constant (for the moment). One of these variables is your money income. If the price falls, given your salary, you will buy more. So, if money income is constant, what type of income would the “income effect” refer to? It is your real income.
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This note was uploaded on 02/22/2011 for the course ECON 2023 taught by Professor Meier during the Spring '11 term at St. Petersburg College.

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2023Ch7SumMcBr - Consumer Behavior Chapter 7 Outline...

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