Chapter 21

Chapter 21 - Chapter 21 Consumer behavior and Demand...

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Chapter 21 Consumer behavior and Demand (Supplementary Notes) We’ve learned from chapter 4 that the price of a good or service is inversely related to the quantity demanded of that good or service: the higher the price, the smaller the quantity demanded; the lower the price, the greater the quantity demanded. This is known as the law of demand. Understanding demand is particularly important for firms in pricing their product. One of the most difficult, yet important, issues you must decide as a firm is how much to charge for your product or service. The profitability of the firm will be affected by the company’s pricing decision. Firms know that consumers will pay more for a good quality of a product, but by how much more . Firms know that the consumers will buy less if the price is high, but how much less . Understanding the consumer behavior in response to changes in price is therefore important in determining what price to charge for a product. The purpose of this chapter is to raise a better understanding of the consumer behavior. The chapter teaches us how we derive the demand curve from the consumer behavior. We will learn how consumers make consumption decisions, how their preferences and budget constraints determine their demands for various goods, and why different goods have different demand characteristics. In understanding consumer behavior, we need to understand three basic elements. First; we need to understand consumer preferences . In other words, we need to find a practical way to describe how people may prefer one good to another. Second; but preferences ignore prices. Therefore we need to account for the fact that consumers have limited budget, or budget constraints - consumers have limited income that restricts the quantities of goods and services they can buy. Third; we then need to put the consumer preferences and budget constraints together to determine consumer choices. In other words, given the consumer preferences and his limited income, what combination of goods he or she will buy that maximize her satisfaction. 1. Consumer Preferences “or Tastes.” Some people may like pizza and hate shawarma, others may hate pizza and prefer shawarma. People are different in their preferences and tastes. We have little to say about why preferences and tastes differ across individuals. While it is an interesting question to explore, it is not what economists are interested in. Economists take preferences as given and assume they are relatively stable. That is, people may have different preferences and tastes, but an individual’s preferences are stable. For example, if an individual prefers chicken (situation A) to beef (situation B), it is taken to mean that he or she feels better off under situation A than under situation B.
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Because there are a vast number of goods and services that exist in any economy, describing consumer preferences can be complex. A good way to begin is to think of preferences in terms of comparisons of market baskets. A
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This note was uploaded on 03/08/2011 for the course ECON 201 taught by Professor Azzam during the Spring '11 term at Alabama.

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Chapter 21 - Chapter 21 Consumer behavior and Demand...

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