551-20 - Chapter 20 - Consumer Choice and Elasticity...

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Chapter 20 - Consumer Choice and Elasticity Opening quotes and questions page 418. MICRO SECTION: Price Theory. "Microeconomics focuses on the choices of consumers, the operation of firms, and the earnings of resource suppliers." We start the micro material in CH 19 by looking at markets for specific products, specifically the demand side of the market (overlap with marketing). The next four chapters (CH 20-23), we will look at the supply side or production side of the market. We look at: 1) interrelationships among markets and 2) the factors that influence demand for specific products. We look at prices - remember the role of prices - they coordinate the $11T of economic activity. Consumer demand, and changes in demand, largely determine prices, along with supply. Prices transmit information - consumer demand, and changes in consumer demand, transmits information to producers. Example: - basketball players salaries vs soccer players salaries. Our tastes/preferences are transmitted by prices - no survey is required - prices do the job invisibly and effortlessly. FIVE PRINCIPLES OF CONSUMER BEHAVIOR As consumers, we constantly make choices, and allocate our income among alternative purchases, based largely on prices, or more accurately Relative Prices: Relative prices implies either: a) the price of Good X versus Good Y, or b) the price of Good X today versus the price of Good X last year. Consumer tastes, preferences, and behavior are constantly changing, and this is the challenge (and opportunity) for producers: How to capture market share and sales, in a dynamic marketplace with continually changing (fickle?) consumers? Role of the entrepreneur: "Discovery process" of finding new products that consumers want - determining and predicting consumer preferences. Consumer sovereignty. Example of dynamic consumer behavior: Consumer spending on food fell from 26% of total consumption in 1963 to 15% in 1999. GENERAL PRINCIPLES OF CONSUMER BEHAVIOR 1. Limited income (scarcity) necessitates choice. Our choices are influenced by, and actually determine, costs. When we choose one alternative, we have to give up something else. Another application of the Opportunity cost concept. 2. Consumers make decisions purposefully. In other words, we are careful (ruthless?) shoppers. "We want the most bang for the buck." Assumption of consumer rationality when making consumption decisions. Consumers value quality, service and low prices, and carefully evaluate purchases to achieve maximum value. 3. One good can be substituted for another . There are substitutes for everything. MGT 551: BUSINESS ECONOMICS – CH 19 Professor Mark J. Perry 1
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4. Consumers must make decisions without perfect information, but knowledge and past experience will help. Perfect information and perfect foresight are not possible. We make decisions under some uncertainty. We learn from experience - our own and others. Examples: a) Brand names and advertising provide low cost information to consumers. Zagats restaurant directory, travel guides,
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This note was uploaded on 01/23/2012 for the course FIN 551 taught by Professor Staff during the Spring '11 term at University of Michigan.

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551-20 - Chapter 20 - Consumer Choice and Elasticity...

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