JWI 515 Managerial Economics, Week3 Summary, 10/28/12
Get inside the mind of consumer (eg. with simulation as a customer with Walmart.com shopping experience)
(1) Constraints
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Money, Time, Resources
(2) Goal - Maximize utility
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To maximize my utility (JWI 515, week2, lecture1) & social
responsibility and lower the implicit & opportunity costs (JWI 515,
week1 lecture1).
As a consumer, make decisions by weighing benefits tied to consumption of goods and services against costs
Utility is the satisfaction that comes from consumption of goods and services.
To maximize total utility, I need to maximize (Budget constraint - Explicit Cost - Opportunity Cost).
I need to do this with a judicious combinations of goods and services.
I need to be conscious that time, cost of car travel & insurance
risk, missing the opportunity to do other profitable work are
opportunity costs.
Evaluating alternative choices, and never losing sight of the
constraint, I need to make the the optimal decisions that lead to
economic profit and social responsibility.
How much quantity I buy of a given item depends on marginal utility ie. the satisfaction gained from consuming one more unit.
At one point law of diminishing marginal utility applies - I as a consumer will limit the quantity of an item I will purchase.
(3) Consumer behavior theory & 3 basic assumptions regarding Utility are:
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(i) Nonsatiation principle - more is better eg. more money brings additional satisfaction or well-being
(ii) Preferences are complete - I as a consumer am able to compare and rank the benefits tied to consumption
indifference => market basket of goods and services provide the same utility
(iii) Preferences are transitive
I as a consumer am able to rank order the desirability of goods and services
Ordinal utility - rank ordering of preferred goods and services ie. A is better than B
Cardinal utility - understand the intensity (weightage) for preferences ie A = 2B
(4) Deliverable: Optimal market basket
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To determine the best feasible combination of goods and services I as a consumer desire and can purchase within a budget.
(5) Use Substitutes and Complements to optimize market basket
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Substitutes: Products that serve same purpose eg. Coke & Pepsi (Hirschey, 2009)
Perfect substitutes satisfy the same need or desire
Complements: Products that are best consumed together
(6) Leverage Price change
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Income effect - increase in consumption due to a price cut or decrease in consumption due to a price increase
Substitution effect - change in relative consumption that occurs as consumers substitute cheaper products for expensive products
(7) Be aware of the key curves
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Price consumption curve (PCC) - Maximize utility for a given product at different prices
Income consumption curve (ICC) - Rising income enables greater consumption, shifts demand curve right
Engle curve - income vs quantity consumed of a good or service
normal good: directly proportional; positive slope
inferior good: inversely proportional; negative slope
eg. bus rides vs income first has positive slope; then shifts to negative slope
(9) Price sensitivity - Elasticity in demand
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Elastic demand - price change leads to more than proportional change in quantity demanded => Revenue changes with price
Unitary elasticity - price and quantity changes offset each other
Inelastic demand - price change leads to less than proportional change
in quantity demanded => Revenue does not change much with price
(10) Demand & Supply
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Several factors influence Demand and Supply in a given industry
Becoming aware of these factors help with profit maximization
(11) Jack Welch Podcast - Managing in Recession
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Cut out the fat that comes with periods of profitable growth
Dr DP
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