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Lecture Essentials of Economics: Chapter 4 - Bradley R. Schiller, Cynthia Hill

Chapter 4 "Consumer demand", after reading this chapter, you should be able to: Explain why demand curves slope downward, describe what the price elasticity of demand measures, depict the relationship of price elasticity, price, and total revenue, recite the factors that influence the degree of price elasticity. | Chapter 4 Consumer Demand What determines what we buy? The Sociopsychiatric Explanation. The Economic Explanation. Determinants of Demand 4- The sociopsychiatric explanation says we consume things to satisfy psychological needs. The economic explanation has to do with the willingness and ability to buy certain goods. Sociopsychiatric Explanation The desire for goods and services arises from our needs for social acceptance (or envy), security, and ego gratification. “Keeping up with the Joneses.” Self-preservation. Expressions of affluence. 4- The Economic Explanation Prices and income are just as relevant to consumption decisions as more basic desires and preferences. The willingness and ability to pay are critical. 4- Determinants of Demand Market demand for a specific product is determined by: Tastes. Income. Expectations. Other goods. The number of consumers in the market. 4- Total Utility Utility is the pleasure or satisfaction obtained from a good or service. Total utility is the amount of satisfaction obtained from entire consumption of a product. 4- In economics utility means satisfaction. The goal of a consumer is to maximize total utility within the constraint of a limited income. Marginal Utility Marginal utility is the change in total utility obtained by consuming one additional (marginal) unit of a good or service. 4- Marginal utility is the additional or extra satisfaction received from the next unit. Figure 4.3 4- Law of Diminishing Marginal Utility The marginal utility of a good declines as more of it is consumed in a given time period. Suppose a student who enjoys popcorn can eat all he/she wants for free. The first box consumed is very rewarding. The third box is decent, etc. After eating the sixth box, she gets sick. 4- Marginal utility eventually falls because the additional units become less satisfying. This usually starts very soon after the first one or two items consumed. The second | Chapter 4 Consumer Demand What determines what we buy? The Sociopsychiatric Explanation. The Economic Explanation. Determinants of Demand 4- The sociopsychiatric explanation says we consume things to satisfy psychological needs. The economic explanation has to do with the willingness and ability to buy certain goods. Sociopsychiatric Explanation The desire for goods and services arises from our needs for social acceptance (or envy), security, and ego gratification. “Keeping up with the Joneses.” Self-preservation. Expressions of affluence. 4- The Economic Explanation Prices and income are just as relevant to consumption decisions as more basic desires and preferences. The willingness and ability to pay are critical. 4- Determinants of Demand Market demand for a specific product is determined by: Tastes. Income. Expectations. Other goods. The number of consumers in the market. 4- Total Utility Utility is the pleasure or satisfaction obtained from a good .