chap 4

1. Who wants the product and in
what quantity?
Ch.4

2. The purchasing decision has a problem with
which the consumers has to deal with

3. • We assume that the entrepreneur has conceived of an opportunity to
make a profit and, as a result, needs to be able to form an idea of
exactly what good or service to provide, how to promote and
distribute it and how its sales may be affected by its price.
• ‘’How do buyers choose what to buy?’’

4. • A demand curve is a graphical representation of the relationship
between the prices that might be asked for a product and the
quantity that consumers are prepared to buy at each of these
possible prices.
• demand curves in reality may have multiple segments with different
slopes and breaks between them

5. • When a price goes above normal ranges of expectations, sales can fall
away sharply until customers get used to the idea of that product
being that expensive------- ‘sticker shock’ (here, ‘sticker’ refers to the
pricing stickers attached to products).
• Kinks in demand curves can also arise as a consequence of how other
firms respond to changes in the price charged for the product, by
changing their prices.----higher prices----higher sale---price is proxy
`for quality---status symbol.

6. Theories of buyer behaviour
• which questions
• Predictions
• Interpret- the consumer’s behavior pattern
• policies

7. •Who is a consumer?
• Somebody who buys a finished product but then a vast
majority of buying takes place between business to business
or buying of intermediate products.

8. • The relationship between what we say about firms and what we say
about consumers also works the other way: consumers also face
make-or-buy decisions, and the household is very much a production
system, just like a factory, except that we call its machines ‘domestic
appliances’ and ‘power tools’

9. Mainstream consumer theory
• Mainstream economists tend to regard their approach to the theory
of choice as one of the major achievements of their way of thinking
about economic problems.
• Mainstream economists actually have two basic approaches to
choice: indifference analysis, which dates from the 1930s, and
marginal utility theory, which was developed half a century earlier.
• Introducing a third mainstream perspective, the characteristics
approach to demand, that was introduced in the 1960s to correct
some of the deficiencies of the two basic approaches.

10. Indifference analysis
• Central to this perspective ----- unlimited wants, limited budgets to
allocate between different types of goods.
• The consumer’s wants are presumed to take the form of a preference
ordering.
• Only some of these combinations will come within the consumer’s
budget constraint, which is determined by the consumer’s income
and price per unit of each product.

13. • Changes in patterns of spending—induced by the changes in the
relative prices or by the income.
• Purchasing power

14. • Example of prices of mobile phone calls.
• When the price of calling goes down…
• Three patterns in the consumer’s consumption can be observed
a) The consumer may increase the number of calls
b) May reduce the number of calls and can spend the amount saved to
another good
c) He can do bit of (a) and a little bit of (b)
• The assumption made by the consumer theory of giving up on
something that was consumed a lot.

15. • The scope for consumption to change as a consequence of changes in
real income leads mainstream theorists to classify goods into
particular categories on the basis of how their sales are affected by
income changes rather than according to any intrinsic properties they
have.
• Thus luxuries are defined as those products that have income-elastic
demand in the sense that their sales increase faster than income
increases. Products whose sales decline when real incomes rise are
known as inferior goods.

16. • It is important to note here that what is a luxury to some buyers may
be an inferior good to other buyers, depending on their preferences
and income levels.
• The basic notion of consumers having preference orderings and
limited budgets and switching the mix of what they buy as relative
prices and/or their incomes change may seem a reasonable
approximation of some kinds of choices, such as how people choose
their groceries.

17. The theory has limited usefulness as a general way
of modelling choice
The indifference approach to theorizing about choice needs the
amounts consumed to be capable of small variations. This is because it
focuses on the consumer’s willingness to make marginal substitutions
in response to changes in price.
• Less success representing discrete choices
• Example
• To buy a flat or a house, buying a movie ticket or not?.

18. • Theory portrays preferences in terms of a ‘field’ in which the
consumer thinks in terms of trading off anything against anything else
with a view to achieving an improvement in well-being.
This presumes that the consumer is not troubled by bounded
rationality
We shop sequentially by comparing items grouped in particular
categories.
The field view also denies that there may be some non-negotiable
areas in the consumer’s life where the consumer will not be willing to
consider trade-offs even in the event of major price changes.

19. • A lack of experience is not a problem for the consumer by specifying
that preference orderings exist over all possible bundles.
As mainstream theorists often put it, ‘know what we want and know
how to get it.
we would find it difficult to know what to do----- new situation due to
losing our jobs, winning a lottery, having a major change of family
circumstances or finding that what is available has changed
dramatically due to technological progress since we were last buying
in a particular market.

20. • It is weak as a piece of science in terms of predictions--prediction
entailed in the so-called ‘law of demand’.
 A price change not only affects the relative attractiveness of rival
products but also the overall purchasing power of the consumer’s
budget.

21. b. Marginal utility theory
• Indifference Analysis----consumers rank bundles----rating of satisfaction.
• Marginal utility theory---- unit of satisfaction utility.
• Just to see how their choice of buying alternative options to affect their
well being the obvious choice could be finding a monetary number to
utility.
• WTP ---for an extra unit----- contingent valuation----environmentally
sensitive projects.
• mainstream theory---WTP----WTA (Example of a Mug)
• theory treats choices as straightforwardly reversible.

22. • Consumers are said to be experiencing diminishing marginal utility if,
having already consumed a number of units of a product, the maximum
amount that they are prepared to pay for the next unit is less than they
were prepared to pay for the last unit they previously consumed.
• obsessive collectors--- (workaholic and pathologies)----acquire multiple
units of a single item.
• The idea of diminishing marginal utility implies an inverse price/quantity
relationship
• Bribe the consumer to consume extra units—cost of disposal---cost of
storage
• time dimension (French fries)

23. • Unlike indifference analysis----spend entire budget.
• comparing
• (a) the marginal utility of spending on the good in question
(b) the marginal utility of holding on to the money
• The theory sees the consumer as adjusting the relative quantities of
the rival products until the marginal utility of A divided by the unit
price of A equals the marginal utility of B divided by the unit price of
B.

24. • In terms of indifference analysis a pair of products would be seen as
substitutes if ______ in the price of one was associated with
_________ in sales of the other, and as complements if a _____ in
the price of one led to an ________ in the sales of both.
• Two products can be defined as being substitutes when the marginal
utilities derived from consuming extra units of either are totally
independent such that to get more of one requires giving up some of
the other and vice versa.
• Products are defined as complementary to each other if the utility
derived from one of them depends on how much of the other is
being consumed.

25. • price elasticity of demand --------the differences in responsiveness of
product sales to changes in _________, cannot be explained.
• Both approaches lack the psychological and physiological basis for
this.

26. c. Demand for product characteristics
• Consumers----set of preferences---pre-specified set of goods---new
products.
• demand for product characteristics--merits of rival products------their
characteristics get traded off against each other,
• The demand for goods and services is thus derived from the demand
consumers have for the characteristics they offer.

27. • The price of the product can be thought of as a negatively rated
characteristic to be traded off against the various non-price
characteristics, with a diminishing marginal willingness to substitute
between characteristics.
• Practical applications of this idea focus on using market research to
discover consumers’ contingent valuations of particular changes in a
product’s specification.
• For example, someone considering the purchase of a microlight aircraft is
perhaps interested in price, safety record, flying range, manoeuvrability,
ease of transportation on the ground and top speed – a total of six
characteristics – and might be looking at, say, four rival models with
different ratings in some or all of these dimensions.

28. • Clearly, if the vast majority of the potential market puts a smaller
value on a particular feature than it costs the firm to add that feature
to the product, it would be best to offer the product without it and at
a price that reflects the saving in production costs. Likewise, if an
extra £50.00 of unit production costs spent could either produce a
speed increase valued at £70.00 by the typical consumer, or an
increase in range valued at £55.00, then the manufacturer’s first
priority should be to increase their microlight’s speed.