Chapter 10 Consumer Choice and Behavioral Economics Utility and consumer Decision making Consumers act so as to make themselves as well off as possible Utility the enjoyment or satisfaction people receive from consuming goods and services o No way of knowing exactly how much enjoyment or satisfaction someone receives from consumer a product o Utility is something directly measurable The utility you receive from consuming a good changes with the quantity of the good you consume Marginal utility t he change in total utility a person receives from consuming one additional unit of a good or service Law of diminishing marginal utility the principle that consumers experience diminishing additional satisfactions they consume more of a good or service during a given period of time Every consumer has to make trade offs Budget constraint the limited amount of income available to consumers to spend on goods and services Optimal decisions are made at the margin The key to making the best consumption decision is to maximize utility by following the rule of equal marginal utility per dollar spent You must equalize your marginal utility per dollar spent not your marginal utility from each good o Marginal utility per dollar spent must be the same for both goods o Budget constraint total spending on both goods must equal the amount available to be spent Income and Substitution Effect of a price change Income effect the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power holding all other factors constant Substitution effect the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods holding constant the effect of the price change on consumer purchasing power Social Influences on Decision Making The effects of celebrity endorsements Network externalities a situation in which the usefulness of a product increases with the number of consumers who use it o Switching costs when a product becomes established consumers may find it too costly to switch to a new product that contains a better technology o Path dependent Because of switching costs the technology that was first available may have advantages over better technologies tat were developed later Sometimes firms will give up some profits in the short run to keep their customers happy and increase their profits in the long run