Chapter 8 Consumer

Chapter 8 Consumer - CHAPTER 8 Consumer Choice...

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CHAPTER 8 Consumer Choice and Demand in Traditional and Network Markets It is not the province of economics to determine the value of life in “hedonic units” or any other units, but to work out, on the basis of the general principles of conduct and the fundamental facts of social situation, the laws which determine prices of commodities and the direction of the social economic process. It is therefore not quantities, not even intensities, of satisfaction with which we are concerned. . . .or any other absolute magnitude whatever, but the purely relative judgment of comparative significance of alternatives open to choice. Frank Knight eople adjust to changes in some economic conditions with a reasonable degree of predictability. When department stores announce lower prices, customers will pour through the doors. The lower the prices go, the larger the crowd will be. When the price of gasoline goes up, drivers will make fewer and shorter trips. If the price stays up, drivers will buy smaller, more economical cars. Even the Defense Department will reduce its planned purchases when prices rise. Behavior that is not measured in dollars and cents is also predictable in some respects. Students who stray from the sidewalks to dirt paths on sunny days stick to concrete when the weather is damp. Professors who raise their course requirements and grading standards find their classes are shrinking in size. Small children shy away from doing things for which they have recently been punished. When lines for movie tickets become long, some people go elsewhere for entertainment. On an intuitive level you find these examples reasonable. Going one step beyond intuition, the economist would say that such responses are the predictable consequences of rational behavior. That is, people who desire to maximize their utility can be expected to respond in these ways. Their responses are governed by the law of demand, a concept we first introduced in Chapter 3 and now take up in greater detail. Predicting Consumer Demand The assumptions about rational behavior described early in the book provide a good general basis for explaining behavior. People will do those things whose expected benefits exceed their expected costs. They will avoid doing things for which the opposite is true. By themselves, however, such assumptions do not allow us to predict future P
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Chapter 8 Consumer Choice and Demand in Traditional and Network Markets 2 behavior. The law of demand, which is a logical consequence of the assumption of rational behavior, does allow us to make predictions. The alert reader may sense an inconsistency in logic. Rational behavior is based on the existence of choice, but a true choice must be free—it cannot be predetermined or predicted. If we can predict a person’s behavior, can that individual be free to choose? Choice is not completely free, nor is complete freedom required by the concept of rationality. As discussed earlier, the individual’s choices are constrained by time and by physical and social factors that restrict his or her opportunities.
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Chapter 8 Consumer - CHAPTER 8 Consumer Choice...

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