ch4 consumer choice

ch4 consumer choice - Part II Chapter 4 Consumer Choice...

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Part II Chapter 4 Consumer Choice Does it ever amaze you how producers somehow know how much of each good to produce? In a primitive society there are very few choices, and people make most of what they consume. In our society, on the other hand, there are hundreds of thousands of goods that consumers can buy. The manager of my local Pavilions told me that he orders more than 3,000 different products each week. Yet there are very few times when what you want to buy is not available and there are very few goods that are left unsold. Many students seem to believe that producers collect information from consumers about what they want through surveys or other market research. You would probably be surprised how little of that is done, other than by large companies when a new good is being introduced. So how do businesses know how much to produce? Remember from the discussion of production possibilities and opportunity cost, that the society can only produce so much and that for each good it produces it has to give up something else. So how are those tradeoffs considered in making the choices of what is produced? Remember, too, that the “optimal outcome” depends on how much benefit each consumer gets from the various goods. If you think about how difficult it can be to get a group of people to decide what they want for dinner, how in the world do we organize what everyone in the world wants to have to eat, drink, play, drive, etc? The simple answer to that question is markets, and the way consumer desires are communicated to markets is through what economists call Demand . In these next two chapters, we look at how consumers make choices based on the benefit they can get, how that translates into consumer demand in each market and how that demand is affected by changes in consumer tastes, incomes and prices. When we study the supply of goods, we will see how that communicates costs to consumers. Finally, when we put supply and demand together, we will see how the market coordinates consumers determining that what gets produced is what benefit them most. But what about the housing bubble or stock market crashes? There are situations when markets are misleading or unstable, such as the recent housing bubble. The model we are building can also explain why sometimes the communication goes haywire and outcomes are undesirable. So, let’s start looking at consumer choice. If you ask a consumer why they are buying something, they will probably tell you that they need the product or that they think it is better than another good or that it is a good deal. However, these are pretty subjective criteria. “Need”, “better’ and “good deal” are all normative expressions since they depend on individuals’ opinions and tastes. Also, economists observe people’s behavior,
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not inner thoughts, to formulate principles. So, how can economist approach consumers demand in an objective, logical fashion? The Budget Constraint
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This note was uploaded on 07/17/2011 for the course ECON 102 taught by Professor Jarv during the Summer '09 term at Rio Hondo College.

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ch4 consumer choice - Part II Chapter 4 Consumer Choice...

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