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12Lecture - LECTURE 12 CONSUMER THEORY In the last part of...

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LECTURE 12 CONSUMER THEORY In the last part of the 18th century (1780-1800) a number of philosophers led by Jeremy Bentham developed the utilitarian philosophy . These individuals are sometimes referred to as Utilitarians . Bentham's basic premise was simple: humans seek pleasure and avoid pain. His philosophy became important to economists, insofar as it was used to explain consumer behavior. His philosophy is the basis of what economists call utility theory . 1 Bentham thought that one day scientists might be able to measure, accurately, the satisfaction a human obtains from, say, consuming an economic good, such as a slice of pizza. (Remember the definition of economics? The science of the allocation of scarce resources for the satisfaction of human wants and needs. Hunger is pain. Eating a good dinner is pleasure. Eating a good dinner satisfies a want. Eating slices of pizza provides a consumer with utility . In this context, utility is synonymous with "usefulness". Some things are more "useful" for satisfying wants and needs than other things. The more useful they are, the more utility they provide. Utility theory assumed that it might be possible to measure how much satisfaction (utility) one could receive from each slice of Uno's pizza that is eaten for dinner. It turns out that we can't measure the utility, or satisfaction, that a person gets from eating a slice of Uno's pizza. However, if consumers act as if it is possible to measure the satisfaction that they get from eating a slice of pizza, we can develop a theory of consumer behavior that is extremely fruitful, and that can explain a lot of human behavior. This newer theory, while based on utility theory, does not require we be able to measure utility scientifically; all we have to do is watch what consumers do, and they will reveal to us all we need to know to prove Bentham correct in his basic premises. It is called revealed preference theory. Let us create a table that represents the satisfaction that one consumer obtains from eating pizza at Uno's. Let us assume that eating slices of pizza provides us with utils , where a util is a unit of satisfaction. Remember, more utils are preferred to less utils, because utils are a measure of how satisfied we are. Table 12-1 shows the number of utils received by the consumer from eating slices of pizza at Uno's at one sitting , or at dinner on one specific day. 2 1 He is viewed as the "godfather", or founder, of The University College of London, and a peer and colleague of Adam Smith, Mill, and other great Classical Economists. 2 Note that the table might show different numbers of utils if, say, the person had eaten a big breakfast earlier in the morning and a big lunch at noon. And the table might show other different numbers of utils if, say, the person hadn't eaten for days, and had been on a diet, and decided to go off the diet by going to Uno's.
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Note that as we eat more and more slices of pizza for dinner, our total satisfaction (or total utility) rises, hits a peak, and then starts to decline. To
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