Demand and the Consumer

1
Demand and the Consumer
2
Marginal Utility Theory

• Utility and consumer satisfaction
• Total and marginal utility
• diminishing marginal utility
• The optimum level of consumption
• consumer surplus
• marginal consumer surplus
• total consumer surplus
• consumer surplus and the marginal utility curve

3
Tinas marginal utility from petrol
MU, P (pence per litre)
Q (litres per annum)
4
Tinas marginal utility from petrol
MU
MU, P (pence per litre)
Q (litres per annum)
5
Marginal Utility Theory

• Utility and consumer satisfaction
• Total and marginal utility
• diminishing marginal utility
• The optimum level of consumption
• consumer surplus
• marginal consumer surplus
• total consumer surplus
• consumer surplus and the marginal utility curve
• rational consumer behaviour

6
Marginal Utility Theory

• Utility and consumer satisfaction
• Total and marginal utility
• diminishing marginal utility
• The optimum level of consumption
• consumer surplus
• marginal consumer surplus
• total consumer surplus
• consumer surplus and the marginal utility curve
• rational consumer behaviour
• maximising consumer surplus P MU

7
Consumer surplus
MU, P
P1
MU
Q1
O
Q
8
Consumer surplus
MU, P
P1
Total consumer expenditure
MU
Q1
O
Q
9
Consumer surplus
MU, P
Total consumer surplus
P1
Total consumer expenditure
MU
Q1
O
Q
10
Marginal Utility Theory

• Marginal utility and the demand curve
• an individuals demand curve

11
Deriving an individual persons demand curve
MU, P
MU D
O
Q
12
Deriving an individual persons demand curve
MU, P
a
P1
MU D
O
Q1
Q
13
Deriving an individual persons demand curve
MU, P
a
P1
b
P2
MU D
Q2
O
Q1
Q
14
Marginal Utility Theory

• Marginal utility and the demand curve
• an individuals demand curve
• the market demand curve

15
Marginal Utility Theory

• Marginal utility and the demand curve
• an individuals demand curve
• the market demand curve
• the shape of the demand curve

16
Marginal Utility Theory

• Marginal utility and the demand curve
• an individuals demand curve
• the market demand curve
• the shape of the demand curve
• shifts in the demand curve

17
Marginal Utility Theory

• Marginal utility and the demand curve
• an individuals demand curve
• the market demand curve
• the shape of the demand curve
• shifts in the demand curve
• Limitations of the one-commodity version

18
Marginal Utility Theory

• Marginal utility and the demand curve
• an individuals demand curve
• the market demand curve
• the shape of the demand curve
• shifts in the demand curve
• Limitations of the one-commodity version
• marginal utility affected by consumption of other
  goods

19
Marginal Utility Theory

• Marginal utility and the demand curve
• an individuals demand curve
• the market demand curve
• the shape of the demand curve
• shifts in the demand curve
• Limitations of the one-commodity version
• marginal utility affected by consumption of other
  goods
• marginal utility of money not constant

20
Risk, Uncertainty and Insurance

• Demand under conditions of risk and uncertainty
• the problem of imperfect information
• Attitudes towards risk and uncertainty
• defining risk and uncertainty
• types of odds
• risk attitudes
• risk neutral
• risk loving
• risk averse

21
Risk, Uncertainty and Insurance

• Diminishing marginal utility of income and
  attitudes towards risk taking
• most people are risk averse
• diminishing marginal utility of incomes

22
Total utility of income
TU
a
U1
Total utility
0
10 000
15 000
5000
Income ()
23
Total utility of income
TU
b
U2
a
U1
Total utility
0
10 000
15 000
5000
Income ()
24
Total utility of income
TU
c
U3
b
U2
a
U1
Total utility
0
10 000
15 000
5000
Income ()
25
Total utility of income
TU
c
U3
b
U2
d
U4
a
U1
Total utility
0
10 000
15 000
8000
5000
Income ()
26
Risk, Uncertainty and Insurance

• Insurance a way of removing risks
• how insurers spread risks
• the law of large numbers
• importance of the independence of risks
• problems for insurers
• adverse selection
• moral hazard

27
The Characteristics Approach

• Consumer choice between products
• importance of products' characteristics
• Identifying plotting characteristics
• plotting a product's mix of characteristics

28
The characteristics of two brands of breakfast
cereal
Quantity of fibre
f1
O
s1
Quantity of sugar
29
The Characteristics Approach

• Consumer choice between products
• importance of products' characteristics
• Identifying plotting characteristics
• plotting a product's mix of characteristics
• changes in a product's characteristics

30
The characteristics of two brands of breakfast
cereal
Quantity of fibre
f1
O
s1
Quantity of sugar
31
The Characteristics Approach

• Consumer choice between products
• importance of products' characteristics
• Identifying plotting characteristics
• plotting a product's mix of characteristics
• changes in a product's characteristics
• The budget constraint

32
The Characteristics Approach

• Consumer choice between products
• importance of products' characteristics
• Identifying plotting characteristics
• plotting a product's mix of characteristics
• changes in a product's characteristics
• The budget constraint
• affects how much of each characteristic can be
  purchased

33
The characteristics of two brands of breakfast
cereal
Quantity of fibre
f1
O
s1
Quantity of sugar
34
The Characteristics Approach

• Consumer choice between products
• importance of products' characteristics
• Identifying plotting characteristics
• plotting a product's mix of characteristics
• changes in a product's characteristics
• The budget constraint
• affects how much of each characteristic can be
  purchased
• effects of a change in the budget

35
The characteristics of two brands of breakfast
cereal
Quantity of fibre
f1
O
s1
Quantity of sugar
36
The Characteristics Approach

• Consumer choice between products
• importance of products' characteristics
• Identifying plotting characteristics
• plotting a product's mix of characteristics
• changes in a product's characteristics
• The budget constraint
• affects how much of each characteristic can be
  purchased
• effects of a change in the budget
• effects of change in a product's price

37
The characteristics of two brands of breakfast
cereal
Quantity of fibre
f1
O
s1
Quantity of sugar
38
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased

39
The efficiency frontier
Healthbran
Quantity of fibre
O
Quantity of sugar
40
The efficiency frontier four brands
Quantity of fibre
O
Quantity of sugar
41
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier

42
Consuming a mixture of two products
Healthbran
Tastyflakes
a
Quantity of fibre
b
O
Quantity of sugar
43
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier
• cases of shifts in the frontier

44
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier
• cases of shifts in the frontier
• The optimum level of consumption

45
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier
• cases of shifts in the frontier
• The optimum level of consumption
• indifference curves

46
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier
• cases of shifts in the frontier
• The optimum level of consumption
• indifference curves
• plotting indifference curves

47
Choosing between brands
Quantity of characteristic A
Quantity of characteristic B
48
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier
• cases of shifts in the frontier
• The optimum level of consumption
• indifference curves
• plotting indifference curves
• the shape of the curves

49
Choosing between brands
Quantity of characteristic A
Quantity of characteristic B
50
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier
• cases of shifts in the frontier
• The optimum level of consumption
• indifference curves
• plotting indifference curves
• the shape of the curves
• the optimum consumption point

51
The Characteristics Approach

• The efficiency frontier
• shows the different combinations of
  characteristics that can be purchased
• interpreting a point on the frontier
• cases of shifts in the frontier
• The optimum level of consumption
• indifference curves
• plotting indifference curves
• the shape of the curves
• the optimum consumption point
• the tangency point

52
Choosing between brands
Quantities of any one of three brands that can
be purchased for a given budget at current
prices. Brand 2 is chosen
Quantity of characteristic A
Quantity of characteristic B
53
Choosing a mixture of brands
Brand 1
Quantity of characteristic A
Brand 2
I5
I4
I3
I2
I1
Quantity of characteristic B
54
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray

55
Choosing between brands
Fall in price of brand 1.
Brand 1 is now chosen
Quantity of characteristic A
Quantity of characteristic B
56
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand

57
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand
• changes in income

58
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand
• changes in income
• parallel movement of efficiency frontier

59
Choosing a mixture of brands
Brand 1
Rise in income
Quantity of characteristic A
Brand 2
I5
I4
I3
I2
I1
Quantity of characteristic B
60
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand
• changes in income
• parallel movement of efficiency frontier
• changes in a product's characteristics

61
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand
• changes in income
• parallel movement of efficiency frontier
• changes in a product's characteristics
• change in slope of product's ray

62
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand
• changes in income
• parallel movement of efficiency frontier
• changes in a product's characteristics
• change in slope of product's ray
• movement along new ray

63
A change in the characteristics of Brand 1
Brand 1 (before)
Brand 1 is now chosen
Characteristics of Brand 1 change
Brand 2
Quantity of characteristic A
Brand 2 is chosen
Quantity of characteristic B
64
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand
• changes in income
• parallel movement of efficiency frontier
• changes in a product's characteristics
• change in slope of product's ray
• movement along new ray
• changes in tastes

65
The Characteristics Approach

• Response to various changes
• changes in a product's price
• movement along the product's ray
• relationship to cross-price elasticity of demand
• changes in income
• parallel movement of efficiency frontier
• changes in a product's characteristics
• change in slope of product's ray
• movement along new ray
• changes in tastes
• shift in indifference curves

66
The Characteristics Approach

• Usefulness of characteristics approach
• helps understand the nature of consumer choice
• helps firms in understanding the effects of
  making changes
• to consumer perceptions
• through changing product specifications
• by promoting various characteristics through
  advertising
• repositioning its product

67
Options open to the firm producing Brand 1
Brand 1
Effect of lowering prices, or advertising
Brand 2
Brand 3
Quantity of characteristic A
a
b
c
I5
I4
I3
I2
I1
Quantity of characteristic B
68
The Characteristics Approach

• Usefulness of characteristics approach
• helps understand the nature of consumer choice
• helps firms in understanding the effects of
  making changes
• to consumer perceptions
• through changing product specifications
• by promoting various characteristics through
  advertising
• repositioning its product
• launching a new brand

69
The Characteristics Approach

• Limitations of characteristics approach
• problem in measuring characteristics
• most products have many characteristics
• only two characteristics can be plotted
• problem in identifying indifference curves
• hard for one individual
• more difficult for whole markets
• but can divide markets into segments
• consumer tastes change