Chapter 20 - Consumer Choice and Elasticity
Opening quotes and questions page 418.
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.
- basketball players salaries vs soccer players salaries. Our
tastes/preferences are transmitted by prices - no survey is required - prices do the job invisibly and
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 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
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