Skip to main content
Loading Explore guides…
Consumer Behavior & Malls · Acedra
Home
Explore
Economics
Consumer Behavior & Malls
Sign in to save
Chat
If YouTube asks you to sign in, open the video on YouTube.
Watch on YouTube
Reload player
Transcript
125 segments
Copy
Hide video
0:00
[Music]
0:23
Consumer behavior shapes how and where we spend our scarce money resources. The items we purchase are sometimes influenced by the celebrities who advertise the goods, sometimes by what our friends consume, or from habits developed while we were children participating in the life our parents created around us. We are going on a socio-economic journey in this chapter as we find understandings about how consumers purchase the things they want and need.
0:58
We start by looking at something so commonplace as a shopping mall. These places were once considered a meeting place of culture and commerce with retailers, restaurants, and theaters. What is happening now? It used to be when a sign at the mall read everything must go these days it could mean the entire mall is shutting down [Demolition Sounds] These are the ruins of a dying culture the American shopping mall. This was a working fountain with it yeah I mean those duffel was I remember
1:42
Woolworth being here and then they bought that skating place in here Audrey Calegary grew up outside of Toledo the mall was always a place to go and like many of her regeneration she spent much of her teenage years hanging out at the mall it was always busy I mean you could even get parking spot a lot here I probably spent most of my paycheck in my high school years at JC Penney and Petries. Audrey wasn't alone, everyone wanted to go to the mall shopping.
2:17
For half a century the mall was the mecca of our booming consumer society and lots of space in this mall! A fact celebrated in many of popular movies. This place has got everything [Applause] America's love affair with shopping malls began in 1956 when the nation's first fully enclosed mall South-dale opened its doors outside Minneapolis. This was the most exciting period in this economy actually the most explosive growth anywhere on earth at any time during history early 50s through the
3:03
70s Robin Lewis is the author of the new rules of retail in the mid 50s Dwight Eisenhower signed the interstate highway act. These new highways will have a far-reaching economic impact on the entire nation and they constructed 54,000 miles of interstate highway now what that did immediately is it provided mobility so they began moving to the suburbs and cities but also what are afforded was the ability to construct these regional malls and they just exploded across the country.
3:41
Between 1956 and 2005 about 1,500 malls were built, including the Mall of America in Minnesota one of the world's biggest 4.2 million square feet 520 stores and amusement part and even a wedding chapel. It was a golden age of shopping, which lasted until a new golden age came along. [electronic static] Courtesy of the internet. All of a sudden the consumer now has everything retail store throughout the world a key-tap away. Today malls across the US are dying no new enclosed mall has been built
4:31
since 2006 and Lewis predicts fully half of all our malls will close in the next 10 years. Why would you get in the car when you can just reach in your pocket? That's the point but if the mall is dead how do you explain this? [Music] On the outskirts of Atlanta we found one formerly dying mall that's thriving where some saw financial ruin Jose Legaspi saw opportunity the color the item that's what brings people from afar into this area in 2005 he took over
5:12
a struggling generic mall and transformed it into Plaza Fiesta designed specifically to meet the needs of an exploding Hispanic population Legaspi has turned dead space into successful Hispanic malls in several cities with large immigrant communities. Looking to expand he discovered the Hispanic population around Atlanta had nearly quadrupled between 1990 and 2000 but one thing was missing. Part of the cultural the Hispanic community is one
5:46
of family, there was not a place where the families together and shopping doesn't just mean shoes and clothing or eating at a restaurant, but it's also a place where they can listen to music, sit down, relax and spend some time with the family. Plaza Fiesta has 280 stores but there's also a doctor's office and a dentist your hairdressing money wiring services everything you might find in a Mexican village there's even a bus station to bring customers in the mall
6:22
had more than four million visitors last year. It's more than one stop shopping it's a one-stop experience. The strategy here exceed the strategy here paying attention to a changing America and giving customers something they can't get on their computer may also be the key to reinvention at other malls in other places says Robin Lewis. If some of these malls over to have a second life what are the keys experience, entertainment, if you're going to
6:55
drag them away from their smartphone and shopping and the internet you gotta give them a reason to spend the time to go and make the effort to go there and the only way they're gonna do that is if there's a fun thing going on and an experience you can't get on-line! Exactly. [Music] All semester I have talked about Positive data analysis as the bread and butter of economists. Now I transition to the topic of Normative data as we consider what makes consumers buy
7:31
what they need and think they want. We do not abandon Positive analysis techniques, but we do articulate choices consumers make by how it impacts our business management decisions. At its pinnacle, consumer behavior is influenced by not only the economy but by how people feel about their decisions in the marketplace. When we concentrate on making a new device, designing a new process, writing a new book, music album, song, computer game, or designing a new building, we rarely think about getting
8:13
a well known spokesman to help sell the product. They do not add anything to the value of the device or process we created, but they might become the difference between a good idea and a great product success. Jamie Foxx here for Verizon did you know Verizon has more than three times the 4g LTE coverage of Sprint? And I'm Jamie Foxx for Sprint pretty much the same coverage if you squint. You are not Jamie Foxx! Sprint is last nationally in 4G LTE Coverage. But whos gonna notice?
8:45
What about the left side of the country? Hugh? this part of Texas, California, New York, etc Look at this - RohHo! Vibrant! Ba da da! Don't get fooled by cut-rate networks. Get the best network in America. [Music]
9:03
[Music
9:09
The limited amount of income available to consumers to spend on goods and services is a budget constraint. A key principle to remember is: optimal decisions are made at the margin. The key to making the best consumption decision is to follow the rule of equal marginal utility per dollar spent: As you decide how to spend your income, you should consume additional units of each good to the point where the last unit of each good gives you the same utility per dollar.
9:51
Budget constraint is the first condition necessary for you to maximize your utility. Total spending on all goods must equal the amount available to be spent. How much satisfaction you get from consuming a particular combination of goods and services depends on your tastes and your preferences. Now look at the second condition, utility. It is the enjoyment or satisfaction people receive from consuming goods and services.
10:27
Although economists no longer use the word 'util' as an objective measure of utility, the economic model of consumer behavior is easier to understand if we assume that utility, like temperature, is directly measurable. Economists use the term marginal utility (MU) to refer to the change in total utility a person receives from consuming one additional unit of a good or service. The law of diminishing marginal utility is the principle that consumers experience diminishing
11:07
additional satisfaction as they consume more of a good.
11:15
This table shows that for the first 5 slices of pizza, the more you eat, the more your total satisfaction, or utility, increases. If you eat a sixth slice, you start to feel ill from eating too much pizza, and your total utility falls. Each additional slice increases your utility by less than the previous slice, so your marginal utility from each slice is less than the one before. Panel (a) shows your total utility rising as you eat the first 5 slices and falling with the sixth slice.
11:58
Panel (b) shows your marginal utility falling with each additional slice you eat and becoming negative with the sixth slice. The height of the marginal utility line at any quantity of pizza in panel (b) represents the change in utility as a result of consuming that additional slice. For example, the change in utility as a result of consuming 4 slices instead of 3 is 6 utils, so the height of the marginal utility line in panel (b) for the fourth slice is 6 utils.
12:44
The economic model of consumer behavior predicts that consumers will choose to buy the combinations of goods and services that make them as well off as possible from among all the combinations of goods and services that their budgets allow them to buy. This is another tradeoff. You select one item based on what it gives you for the price you have to pay to get it.
13:15
You have a real gut buster meal of pizza and coke. You get utils from each, and from the combination. Consider the additional slices of pizza and cups of coke. If taken individually you can measure your total utility building as each additional slice and can are consumed. Give attention to the Marginal Utility columns to see how fourth slice of pizza increased total utility to 52 utils, but only made a marginal increase of 6 utils for the last slice consumed. The same applies to cups of Coke.
14:01
The first was great, but by the sixth cup, you are getting sick. At least stop at 5.
14:13
We use that hypothetical measurement of product Marginal Utility to put it in terms of money spent to achieve that utility. The Marginal Utility of the first slice of Pizza is 20 Utils and at $2 per slice, we final the Marginal Utility per Dollar of that first slice is 10. Moving down the column, find how the fourth slice delivers 3 marginal utils per dollar. Do the same for cups of Coke which costs $1 per cup to see how the marginal utility per
14:53
dollar drops from 20 to 5 as we move from the first cup to the fourth. It seems this exercise is academic because there is no consistent measurement of Utility. Your utility from consuming slices Pepperoni Pizza is most likely different from my utility from consuming the same pizza. I just am not a fan of oily, cheezie, and fatty meat combinations placed on a pizza dough platform. Cups of Coke? Nuh-uh. I start with a negative marginal utility for all of these combinations.
15:37
For me, I'm just not interested. How do we make comparisons of consumers from this personal preference measurement? It is the reality of personal choice in the markets. I may like it for nothing and my demand will show it that way. You may like it a bunch, and that is your utility at work carrying your scarce dollars to the market. This makes it possible to combine products under a uniform metric. Assume that you met your budget constraint, but the marginal utility per dollar of one
16:20
good (Coke) was greater than the marginal utility of another good (pizza). You could raise your total utility by buying less pizza and more Coke. Seek the biggest bang for your buck. In this simplistic combination of goods, you can articulate these in terms of the marginal utility per dollar spent. It assumes you can personally allocate your consumption of slices of pizza and cups of Coke by spending from your budget to make comparative use maximization.
16:59
You seek combinations that increase your net total utility from the basket of goods consumed: pizza and Coke. If your budget is $10, you would eat 3 slices and drink 4 cups. Think about this, we are considering marginal utilities of goods per dollar spent. This assumes that you value the consumption of these goods more than you value the money remaining in your possession. That is an important message to take away from these discussions.
17:36
We are considering your budget constraint as it applies to only two goods: pizza and Coke. When you consider all goods you can consume and your total budget, you arrive at the place called YOUR LIFE. This is where are.
18:00
Dialing back to our two product market, we need to consider how the economist in all of us seeks to maximize our total utility. Set your marginal utility divided by the price of one good, equal to the ratio of the other good. The result is constrained by your budget and you will spend that budget to build your overall utility one product at a time. Keep this one handy. It might be your choices for pizza and a beverage of choice, or for your jacket and shoe combination,
18:38
even your vehicle of choice and the cost of fuel. Really, the maximization of your utility determines the choices you make in the marketplace, whether you realize it or not: you think like an economist.
18:57
You can think like an economist to follow these choices based on the increase of your marginal utils for each dollar spent. You do this mostly without thinking. You might have been at a lunch with your friends to see how they ordered two more pitchers of drink when you thought another pizza was in order. What's up with that? It is about the person making the decision having a different marginal utility than you did. Individually, you will follow your marginal utility maximization as you spend
19:36
your budget limit.
19:40
Prices change and that means your ratio of marginal utility divided by cost changes. The marginal utility of pizza divided by the new price of pizza, set to the ratio for Coke will generate a new solution for your basket of utility optimization. If it is a Normal good, your consumption of the lower cost pizza will increase and the unchanged price of Coke will decrease its consumption. This comes about because the lower price acts like an income increase - you can buy more
20:22
products with your limited budget. We call it the Income Effect. This also involves the substitution effect because relative costs changed and you are seeking utility maximization through the combinations.
20:42
A change in price has two effects on the quantity demanded. The income effect is 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. This is where Normal goods and inferior goods come into play. If we consider Normal goods then a decrease in price will result in an income effect to increase consumption.
21:16
If it is the Inferior good, then even a reduction in the price of the good will result in the Income Effect to reduce consumption of the Inferior Good.
21:30
The substitution effect is 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. It can be seen as you having more disposable income, but really we are considering you gaining more utility while spending your budget. Your allocation of money in exchange for those goods will reflect your personal choices to
22:08
acquire your favorite flavor of utils.
22:14
We just step back to the comparative analysis of cost and marginal utility of each product given the new price of pizza. This gives us the ability to make those comparisons to ask how many slices and how many cups will combine to deliver the highest utility for my budget. We purchase full-slices of pizza and drink full cups of Coke so we cannot consider marginal parts of each - no fractional parts. That means we find the optimum at 4 slices and 4 cups costing $10 to deliver 102 utils,
22:57
as compared to the higher cost pizza where you consumed 3 slices and 4 cups for $10 to receive 96 utils. In this case, the lower pizza cost increases your pizza consumption while leaving your Coke consumption the same. It did not have to end this way, as the Income effect may have increased your consumption of both products. Always be ready for that possibility.
23:28
This is another "remember this table" event. Here we consider the Substitution and Income Effects and how they interact with the most notable Normal and Inferior goods. We spend a budget used to maximize our utility of goods and services. While it is clear to think of a raise in salary as an obvious income effect where we can spend a greater budget to get what we want, the lowering of price can have the same effect to make our spending budget increase - an item we purchase costs less!
24:07
That is the Income Effect and we will react to it.
24:15
[Music]
24:21
A consumer responds optimally to a fall in the price of a product by consuming more of that product. In panel (a), the price of pizza falls from $2 per slice to $1.50, and the optimal quantity of slices consumed rises from 3 to 4. When we graph this result in panel (b), we have the consumer's demand curve. It is derived from the combination of price and your desire to consume it.
24:55
A market demand curve is constructed by adding horizontally the individual demand curves of consumers of a particular good. According to the law of demand, market demand curves always slope downward: Downward Sloping Demand. This is true because the income and substitution effects of a fall in price cause consumers to increase the quantity of the good they demand. But there is a complicating factor. Only Normal Goods will see the income effect result in consumers increasing the quantity
25:35
of the good they demand when the price falls. The income effect for an inferior good leads consumers to decrease the quantity of the good they demand. The substitution effect results in consumers increasing the quantity they demand of both normal and inferior goods when the price falls. When the price of an inferior good falls, the income and substitution effects work in opposite directions. The income effect for an inferior good would have to be greater than the substitution effect
26:15
for a demand curve to be upward sloping. Did you catch that one: to become an Upward Sloping Demand curve an inferior good would have to have the Income Effect be greater than the substitution effect. There is a special situation for this one. Let us look closely at a Giffen Good.
26:43
There are three necessary pre-conditions for the Giffen Good situation to arise: 1. the good in question must be an inferior good, 2. there must be a lack of close substitute goods, and 3. the goods must constitute a substantial percentage of the buyer's income, but not such a substantial percentage of the buyer's income that none of the associated normal goods see an increase in demand. Consider this rice example from China. There are many types of rice, not just white and brown rice.
27:27
Rice is classified by the size of its grain into long, medium and short varieties and ranges from fluffy to creamy to sticky in texture. Color varies from brown to white to red. The shape, size, texture and other characteristics of the different varieties affect the way the rice is used in recipes, what types of dishes it is suitable for, and the way it is cooked. Each country favors particular varieties for its cuisine.
28:04
Giffen goods are named after Scottish economist Sir Robert Giffen, to whom Alfred Marshall attributed this idea in his book Principles of Economics in 1890. Sir Giffen first proposed the paradox from his observations of the purchasing habits of the Victorian era poor. In economics and consumer theory, a Giffen good is a product that people consume more of as the price rises and vice versa -violating the basic law of demand in microeconomics.
28:41
But a Giffen good is so strongly an inferior good in the minds of consumers, being more in demand at lower incomes, that this contrary income effect more than offsets the substitution effect, and the net effect of the good's price rise is to increase demand for it.
29:05
Consider this graph of two rice varieties and the budget constraint of a consumer. When an inferior rice commodity decreases in price it alters the substitution effect. Initially we expect this will allow the purchase of more of the inferior rice grade. But this shift of the consumer's purchasing power means they can spend more on the substitute good - a normal good here called Superior Rice, which may be a greater source of calories and carbohydrates.
29:43
In order to achieve their dietary budget for calories and carbohydrates with a limited budget, consumers can spend more of their limited money on the higher calorie and carbohydrate variety of rice while also meeting quantity needs with the combination of the two rice varieties. When the inferior rice variety price drops, the budget constraint shifts creating new purchase possibilities giving the consumer the ability to purchase more of the higher
30:17
carbohydrate and calorie rice and less of the inferior grade bulk rice option. This Giffen good reality is found when the inferior good price dropped and all other constraints were held constant - ceteris paribus. Very soon we will talk about Veblen goods, a similar price change phenomenon, but from strikingly different consumer behavior characteristic.
30:50
[Music]
30:56
[Music] Named after economist Thorstein Veblen who introduced the term conspicuous consumption of Veblen good is one who demand increases as its price increases because consumers see it as an exclusive status symbol unlike most goods which have a downward-sloping demand curve because demand goes down as price goes up, a Veblen good has an upward sloping demand curve Veblen Goods are high-quality coveted items they are designer luxury
31:28
items with a strong brand identity and they are not sold in regular stores these goods are priced so high that only the very affluent can afford them the higher the price the less likely other consumers can afford them and the more buyers perceive them to signal great wealth and success if of Veblen Good price decreases demand will decrease because status conscious consumers will see it is less exclusive. James is a multi-millionaire baseball player he can afford any car he wants.
31:57
With while a ten-thousand-dollar used pickup truck would suit his needs he doesn't even drive that much since he's on the road for game so often he decides to purchase a two-hundred-thousand-dollar luxury car so that people will know someone important and successful is inside the winnings at home and needs to get around town James love the feeling he gets from driving your car that almost no one else can afford for James his two-hundred-thousand-dollar car is a
32:21
symbol of status and delete major-league athlete a fifty-thousand-dollar or even $100,000 car wouldn't satisfy him because too many other people could afford it.
32:38
Although economists have traditionally seen factors such as culture, customs, and religion as relatively unimportant, recently some economists have studied how social factors like these influence consumer choice. We are a social crowd, we sometimes buy things because someone else we know bought them, or because we are more familiar with the selections we have made for years. Changing product choices can be challenging even when the new choice opens new opportunities. We are creatures of habit.
33:22
If consumers believe that movie stars or professional athletes use a product, then demand for the product will often increase. It is the celebrity endorsement made by Jamie Foxx for Verizon Wireless at the beginning of this lecture. Think about that - who is Verizon Wireless attracting by using that celebrity personality? Demand increases partly because consumers believe public figures are particularly knowledgeable
33:55
about products, but also because they feel more fashionable and closer to famous people if they use the same products these people do. Technology can play a role in explaining why consumers may be attracted to buying products that other consumers are already buying. A situation in which the usefulness of the product increases with the number of consumers who use it is a network externality. Some economists raised the possibility that network externalities might result in consumers
34:34
buying products that contain inferior technologies because network externalities can create switching costs: Once a product becomes established, consumers may find it too costly to switch to a new product that contains a better technology. The selection of products may be path dependent; that is, because of switching costs, the technology that was first available may have advantages over better technologies that were developed later.
35:11
Some economists have argued that because of path dependence and switching costs, network externalities can result in market failure. Because of this, some people think that government intervention in these markets might improve economic efficiency. What do you think? Have you seen examples of government intervention that improve economic efficiency? Hmmm. Think about it.
35:44
There is evidence that people like to be treated fairly, and they usually attempt to treat others fairly, even if doing so makes them worse off financially. Economists have used experiments to increase their understanding of the role that fairness plays in consumer decision making. One consequence of the importance of fairness to consumers is that firms will sometimes not raise the prices of their goods and services, even when there is a large increase in demand,
36:22
because they are afraid customers will consider the price increases unfair and buy elsewhere. Sometimes firms will give up some profits in the short run to keep their customers happy and increase their profits in the long run. In the business world of realities, we call this capturing market share.
36:49
The ultimatum game is a game in economic experiments where the first player, the proposer, receives a sum of money and proposes how to divide the sum between the proposer and the other player. The second player, the responder, chooses to either accept or reject this proposal. If the second player accepts, the money is split according to the proposal. If the second player rejects, neither player receives any money. The game is typically played only once so that reciprocation is not an issue.
37:30
You might be surprised that several people in the second player position will reject the proposal knowing that neither of them receives anything. On average, the second player will be in a better position by accepting anything, but a sense of fair play and the perception of not losing can dominate the decision matrix. You want to make some fun with this game? Set it up with your comrades to put them into groups of two with first players writing their offers confidentially.
38:06
See what the second players accept and reject. In the dictator game, the first player, the dictator, determines how to split an endowment, such as a cash prize, between himself and the second player. The second player, the recipient, simply receives the remainder of the endowment left by the dictator. The recipient's role is entirely passive and has no input into the outcome of the game. As a result, the dictator game is not formally a proper game, as the term is used in game theory.
38:46
To be a proper game, every player's outcome must depend on the actions of at least one other player's outcome. Since the dictator's game outcome depends only on his own actions, this situation is one of decision theory. Despite this formal point, the dictator game is used in the game theory literature as a degenerate game. This game has been used to test the homo-economics model of individual behavior: if individuals
39:21
were only concerned with how much money they receive, dictators would allocate the entire good to themselves and give nothing to the recipient.
39:35
Results show that adults often allocate money to the recipients, reducing the amount of money the dictator himself receives. In modified versions of the dictator game, children also tend to allocate some of a resource to a recipient and most five-year-olds share at least half of their goods. Another variation reveals that if the initial cash amount is unknown by the recipient, the Dictator commonly retains a large portion of the initial endowment.
40:12
Think about it- what would you do if you were the Dictator?
40:20
Fairness is a fickle friend when we talk about something important, like money. During the culmination of the US economic expansionary period in 2008, before the Great Recession's collapse, oil price climbed and many airlines introduced fuel surcharges passed on to their clients. That's fair, right? After the trough of the Great Recession in 2011, air travel slowly began to recover just as oil prices dropped.
40:55
The net effect was of climbing consumer demand and decreasing oil prices resulting in mostly unchanged prices with increased demand. The fairness issue became a fleeting consideration because people were accustomed to the fuel surcharge prices and the level prices despite a shift of demand to the right. Leave well enough alone, right? Is that fairness?
41:28
[Music]
41:34
Behavioral economics studies the effects of psychological, social, cognitive, and emotional factors on the economic decisions of individuals and institutions and the consequences for market prices, returns, and resource allocation, although not always that narrowly, but also more generally, of the impact of different kinds of behavior, in different environments of varying experimental values. Risk tolerance is a crucial factor in personal financial decision making.
42:13
Risk tolerance is defined as individual's willingness to engage in a financial activity whose outcome is uncertain. Behavioral economics is primarily concerned with the bounds of rationality of economic agents. Behavioral models typically integrate insights from psychology, neuroscience and microeconomic theory; in so doing, these behavioral models cover a range of concepts, methods, and fields. The study of behavioral economics includes how market decisions are made and the mechanisms
42:53
that drive public choice.
42:57
I speak frequently about opportunity costs, and you should be aware that monetary and non-monetary considerations go hand in hand for the decisions you make. In this Super Bowl ticket lottery win, the consumer who would not have bought the $3,000 ticket initially, but then declines to sell the won ticket is violating the realities of opportunity costs. In that case, you should be ready to sell the ticket. "I won a ticket I would not have bought", or, "I won $3,000!"
43:36
People do not always balance these considerations like an economist would. Some people do not want to sell the ticket, because they like being the winner. For me as an Economist, I would sell the ticket and know that I won $3,000! Woo Hoo! In psychology and behavioral economics, the endowment effect is the hypothesis that people ascribe more value to things merely because they own them. It is mine! I'm gonna keep it.
44:13
This explains why "that room" of your parent's house is full of things you have not seen for decades, but they are kept because "they still work, they are good stuff, that's worthmoney!" Hmm, it is endowment goods staying on your shelf.
44:39
In economics and business decision-making, a sunk cost is a cost that has already been incurred and cannot be recovered. Sunk costs, also known as retrospective costs, are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed or variable costs. Many economists consider that when a firm sinks $400 million on an enterprise software
45:20
installation, that cost is "sunk" because it was a one-time expense and cannot be recovered once spent. A "fixed" cost would be monthly payments made as part of a service contract or licensing deal with the company that set up the software. You cannot change the past just as you cannot recoup a sunk cost. You will hear people say things like, "We spent $100,000 on this program, we have to maintain expenses to recoup our investment!" Really?
45:57
No, you need to consider all options including your current investment and all other options available. Optimality may be found with the current assets, or with new technologies and opportunities. Your past spending events do not influence your current earning decisions. Arnold Kim understands Sunk Costs. He laid out $200,000 and about 10 years of his life to become a medical doctor. That is a serious sunk cost both in terms of monetary and non-monetary events.
46:42
But while studying in college he needed to make ends meet so he started blogging and made it by selling advertising for about $100,000 a year. His expenses were super low and he set his own hours. Does it mean he wasted his education? NO It doesn't matter, those monetary and non-monetary events are sunk costs. Can't change 'em, so he got on with his life as a blogger. Ponder this one a bit for your personal life, now and for your future.
47:20
This can provide loads of clarity for the decisions you make in life. Catch yourself when you say to yourself something like, "I wasted so many years on" blankety-blank. It is one of your sunk costs, now move on.
47:40
Predicting your own personal behavior is as slippery as a slug trail. Do you visualize it? Did I just gross you out with that symbolism? This is as surprising as our decisions to change a bad habit, like smoking, drinking, overeating, gambling, swearing, or arguing. As much as people want to change, they mostly have little success in making the change. This is the reality of consumer behavior as wanting is not the same as achieving, at least not for everyone.
48:21
So, if people individually are not honest with themselves, what hope do we have as business people to predict what they will do en masse in the markets? Complex decision-making is a process, not an end result. We use consumer intent and factors of change as part of our factors of prediction to serve the marketplace. Our journey leads us to participation in the consumer behavior marketplace.
48:56
It seems that most time people spend on decision making is deciding between two alternatives that ultimately are equivalent. Challenging as the options are, extensive time is spent because the difference in the outcomes were so close that a deciding factor was not obvious. This is where a rule of thumb may be applied ultimately saving on the expenditure of the most scarce of resources - your time. Anchoring is another tactic applied by retailers.
49:34
You can go into most any retail store to find a special sale with a limit of 10 items per customer. "This is such a great deal that we need to limit how many each person can buy, just to make sure we have enough to go around". Yah right. As consumers, we are a bunch of lemmings following the crowd. It is successfully done to get us to buy 10 items when we really came for only one. But, it works!
50:11
J.C. Penny, founded in 1902 was once a central retail outlet filling a niche of catalog sales. When CEO Ron Johnson floated the "everyday low pricing" model, sales plummeted. Turns out consumers wanted to shop the "sale prices". They wanted to get that good deal available TODAY! That is anchoring regardless of what the regular price is, and how much it is selling for now. Johnson missed this behavioral economics lesson. People want to feel like they are getting a good deal.
50:55
CEO Ron Johnson gave a bad deal, and now, he is looking for another job.
51:05
[Music]
51:11
An indifference curve shows the combinations of consumption bundles that give the consumer the same utility. An indifference curve assumes that consumption bundles consist of various amounts of only two goods. Each possible combination of two goods (for example, cans of Coca-Cola and slices of pizza) has an indifference curve passing through it. A consumer is indifferent along all the consumption bundles that are on the same indifference curve.
51:46
In a graph of indifference curves, the further to the north-east a curve is, the greater the utility it represents.
52:00
Every possible combination of pizza and Coke will have an indifference curve passing through it, although in the graph we show just four of Dave's indifference curves. Dave is indifferent among all the consumption bundles that are on the same indifference curve. So, he is indifferent among bundles E, B, and F because they all lie on indifference curve I3. Moving to the north-east, the upper right in the graph increases the quantities of both goods available for Dave to consume.
52:36
Therefore, the further to the north-east the indifference curve is, the greater the utility Dave receives.
52:47
The marginal rate of substitution (MRS) is the rate at which a consumer would be willing to trade off one good for another. The MRS decreases as an indifference curve becomes less steep as one moves down the curve; indifference curves are bowed in or convex.
53:14
Think about those points on the same indifference curve. Our consumer, Dave, is indifferent to bundles B and F. He is just as happy with either, that is why they are on the same indifference curve.
53:33
Because bundle X and bundle Z are both on indifference curve I1, Dave must be indifferent between them. Similarly, because bundle X and bundle Y are on indifference curve I2, Dave must be indifferent between them. The assumption of transitivity means that Dave should also be indifferent between bundle Z and bundle Y. We know he won't be however, because bundle Y contains more pizza and more Coke than bundle Z. So, Dave will definitely prefer bundle Y to bundle Z, which violates the assumption of
54:17
transitivity. Therefore, none of Dave's indifference curves can cross.
54:26
Dave's budget constraint shows the combinations of slices of pizza and cans of Coke he can buy with $10. The price of Coke is $1 per can, so if he spends all of his $10 on Coke, he can buy 10 cans (bundle G). The price of pizza is $2 per slice, so if he spends all of his $10 on pizza, he can buy 5 slices (bundle L). As he moves down his budget constraint from bundle G, he gives up 2 cans of Coke for every slice of pizza he buys.
55:04
Any consumption bundles along the line or inside the line are affordable. Any bundles that lie outside the line are unaffordable.
55:18
Dave would like to be on the highest possible indifference curve, but he cannot reach indifference curves such as I4 that are outside his budget constraint. Dave's optimal combination of slices of pizza and cans of Coke is at point B, where his budget constraint just touches "or it is tangent to" the highest indifference curve he can reach. At point B, he buys 3 slices of pizza and 4 cans of Coke.
55:53
A fall in the price of pizza from $2 per slice to $1 per slice increases the maximum number of slices Dave can buy with $10 from 5 to 10. The budget constraint rotates outward from point A to point B to show the effect of the price decrease.
56:18
In panel (a), a fall in the price of pizza results in Dave's consuming less Coke and more pizza: A fall in the price of pizza rotates the budget constraint outward because Dave can now buy more pizza with his $10. In the new optimum on indifference curve I2, Dave changes the quantities he consumes of both goods. His consumption of Coke falls from 4 cans to 3 cans. In the new optimum, Dave's consumption of pizza increases from 3 slices to 7 slices.
56:58
In panel (b), Dave responds optimally to the fall in the price of pizza from $2 per slice to $1 per slice, by increasing the quantity of slices he consumes from 3 slices to 7 slices. When we graph this result, we have Dave's demand curve for pizza.
57:22
Following a decline in the price of pizza, Dave's optimal consumption of pizza increases from 3 slices per week (point A) to 7 slices per week (point C). We can think of this movement from point A to point C as taking place in two steps: The movement from point A to point B along indifference curve I1 represents the substitution effect, and the movement from point B to point C represents the income effect.
57:55
Dave increases his consumption of pizza from 3 slices per week to 5 slices per week because of the substitution effect of a fall in the price of pizza and from 5 slices per week to 7 slices per week because of the income effect.
58:15
When the income Dave has to spend on pizza and Coke increases from $10 to $20, his budget constraint shifts outward. With $10, Dave could buy a maximum of 5 slices of pizza or 10 cans of Coke. With $20, he can buy a maximum of 10 slices of pizza or 20 cans of Coke.
58:42
An increase in income leads Dave to consume more Coke and more pizza. 1. An increase in income shifts Dave's budget constraint outward because he can now buy more of both goods. 2. In the new optimum on indifference curve I2, Dave changes the quantities he consumes of both goods. His consumption of Coke increases from 4 to 6 cans. 3. In the new optimum, Dave's consumption of pizza increases from 3 to 7 slices.
59:22
At the point of optimal consumption, the marginal rate of substitution is equal to the ratio of the price of the product on the horizontal axis to the price of the product on the vertical axis. At the point of optimal consumption, the MRS is equal to the ratio of the price of the product on the horizontal axis to the price of the product on the vertical axis. The slope of the indifference curve tells us the rate at which a consumer is willing to trade off one good for the other.
59:58
The slope of the budget constraint tells us the rate at which the consumer is able to trade off one good for the other. This condition is equivalent to stating that consumers maximize utility when they consume each good up to the point where the marginal utility per dollar spent is the same for every good.
1:00:26
The rule of equal marginal utility per dollar spent states that if consumers spend their income so that the last dollar spent on each product gives them the same marginal utility, they will maximize their utility. Indifference curves and budget constraints can be used to show why this rule will hold. Assume that a consumer (Dave) consumes Coke and pizza. Dave's indifference curves and budget lines are illustrated in a graph with cans of Coke
1:01:03
(per week) measured on the vertical axis and slices of pizza (per week) measured along the horizontal axis. When Dave consumes less Coke by moving down an indifference curve, he loses utility equal to: Negative (change in quantity of Coke) times the (marginal utility of Coke) At the same time he consumes more pizza, so he gains utility equal to: Change in the (Quantity of pizza) times the (marginal utility of pizza) Because Dave moves along an indifference curve,
1:01:39
the loss in utility from consuming less Coke equals the gain in utility from consuming more pizza. The change in utility can be written: Negative (change in quantity of coke) times the (marginal utility of Coke) which equals the (change in quantity of pizza) times the (marginal utility of pizza) Rearranging terms yields: Negative (change in quantity of coke) divided by (change in quantity of pizza) Which equals (marginal utility of pizza) divided by (marginal utility of coke)
1:02:17
Note that when we consider the negative change in quantity of coke divided by change in quantity of pizza is the slope of the indifference curve (the marginal rate of substitution, multiplied by 1). Therefore, we can write: the marginal rate of substitution is equal to the Marginal Utility of pizza divided by the marginal utility of coke. The slope of Dave's budget constraint equals the price of pizza divided by the price of Coke.
1:02:48
At the point of optimal consumption, the slope of the indifference curve is equal to the slope of the budget line. Therefore, the Marginal Utility of pizza divided by the marginal utility of coke is equal to the price of pizza divided by the price of coke. Finally, understand that we can rewrite this to show that at the point of optimal consumption is marginal utility of pizza divided by the price of pizza which is equal to the marginal utility of coke divided by the price of coke.
1:03:24
This expression is the rule of equal marginal utility per dollar spent.
1:03:34
As economists, we apply understandings of human behavior to assume they are rational and respond to incentives to increase their utility. We know people are not always rational, and people are not always seeking to improve their lot in ways we see all the details. We can simply take the position that ON AVERAGE people are rational and seek maximize their personal utility of the money they spend.
1:04:09
[Music]
Here to help you learn
Sign in to keep a private conversation with your course tutor.
Ask me anything about the material…
Sign in to chat