Lecture 8
Consumption and Consumer
Society
Consumer behavior: The
marketing view
• Why do consumers want what they want? Why do they
buy what they buy?
• The degree to which we perceive a need may be related to
two factors:
– Our own past experience
– Experience of groups to which we compare ourselves
(reference points/groups)
Consumer behavior: The utility theory view
• This view portrays consumer behavior as relatively simple, rational,
untouched by social influences
• It focuses on behavior that individual consumers would logically
pursue, given certain assumptions
• Question: How should consumers rationally allocate their limited
budget to various goods and services they want?
• Assumptions:
–
–
–
–
–
–
–
Marginal thinking is possible
People are rational, autonomous decision makers
All benefits from consumption choices can be compared and summed up
Consumer’ preferences can be taken as given
Consumers have perfect information
There no externalities in consumption
There are no multliple equilibria, no non-convexities
Utility theory: Budget line
Utility theory: Budget line
10
(0, 10)
8
8
Possible consumption
combinations when:
Income = $10
PC = $1
PN = $2
7
6
5
4
3
2
Quantity of Chocolate (bars)
Quantity of Chocolate (bars)
9
(0, 8)
Possible consumption
combinations when:
Income = $8
PC = $1
PN = $1
7
6
5
4
3
2
1
1
(8, 0)
(5, 0)
0
1
2
3
4
5
6
7
Quantity of Nuts (bags)
8
9
0
1
2
3
4
5
6
7
Quantity of Nuts (bags)
8
9
Utility theory: Utility function
• Utility
The pleasure or satisfaction from goods, services, or events
• Utility function (or total utility curve)
A curve showing the relation of utility levels to consumption levels
18
Total
Utility
16
(2, 14)
Utility (utils)
14
Utility from Chocolate Bars
Number
12
+5
10
0
1
2
3
4
5
(1, 9)
+1
8
6
4
2
0
1
2
3
4
Quantity of Chocolate (bars)
5
6
Total
Utility
0
9
14
17
17
16
Marginal Utility
(MUC)
—
+9
+5
+3
0
1
Utility theory
Maximizing Utility from Chocolate and Nuts
Number of Bars
or Bags
0
1
2
3
4
5
Chocolate (PC = $1 per bar)
MUC
MUC /PC
—
—
+9
9
+5
5
+3
3
0
0
1
1
Nuts (PN = $2 per bag)
MUN
MUN /PN
—
—
+14
7
+12
6
+10
5
+4
4
+2
1
A formal theory of consumer behavior
• Assumptions:
– The only consumer is the household (HH)
– The HH has clearly defined preferences over all the
goods it might consume
– The HH wants to have the consumption bundle which
maximizes utility (sum of its satisfactions)
– The HH (or the consumer) is well-informed,
autonomous and rational
– The HH considers only its own preferences, budget, and
prices
– For simplification, here, we look at two goods only, X
and Y
A formal theory of consumer behavior
8
(0, 8)
Quantity of Y
7
6
5
Slope = -Px /Py
4
3
2
1
(4, 0)
0
1
2
3
4
5
6
Quantity of X
7
8
9
A formal theory of consumer behavior
Indifference curve:
A curve consisting of points representing
combinations of various quantities of
two goods, such that every such combination
gives the consumer the same level of utility
Marginal rate of substitution:
How much of one good the
consumer is willing to give up
to get more of another
A formal theory of consumer behavior
9
Different levels of utility
8
Quantity of Y
7
6
5
4
3
Higher Utility
2
Lower Utility
1
Still Lower Utility
0
1
2
3
4
5
6
Quantity of X
7
8
9
A formal theory of consumer behavior
9
8
Quantity of Y
7
Utility maximization
B
6
5
D
A
4
3
2
1
0
C
1
2
3
4
5
6
Quantity of X
7
8
9
A formal theory of consumer behavior
9
Response to a price change
8
Quantity of Y
7
6
5
B
A
4
3
2
1
0
1
2
3
4
5
6
7
8
9
Consumer society
• Consumerist values:
The belief that meaning and satisfaction in life are to be found
through the purchase and use of consumer goods
• Institutions of consumer society:
– Advertising
– Consumer credit
– Credit cards
Consumer society
Advertising
– Usually justified as a source of information about
products and services available in the marketplace
– But also: it promotes the idea that purchasing things, in
itself, is a pleasurable activity
– Some figures:
• In 2004, advertising spending in the U.S. was estimated to be
over $ 263 billion.
• This was larger than the GDP of countries such as Denmark and
Saudi Arabia.
• By the mid-1990s, the average American adult was exposed to
about 3000 ads every day.
Consumer society
• Does more consumption make people happier?
– At a given point in time, people with more to spend generally
report themselves as somewhat more satisfied with their
lives than do people with less to spend
– Over time, however, more consumption does not seem to be
related to more happiness in affluent societies
– In 1957, 35% of respondents in a U.S. survey said they were
«very happy»
– In 1998, 32% said that they are «very happy» despite the fact
that the purchasing power of an average U.S. citizen doubled
Consumer society
• A study in 1995 in the U.S.:
– 1/3 of all respondents in households with income between
$75.000-$100.000 agreed that «I cannot afford to buy
everything I really need» and «I spend nearly all of my
money on the basic necessities of life»
– 27% of those with incomes above $100.000 agreed that they
«cannot afford to buy everything I really need»
Life Satisfaction Index
Source: OECD Better Life Index
http://www.oecdbetterlifeindex.org/topics/life-satisfaction/
GDP per capita in US dollars, 2010, current prices, PPP
100000
90000
80000
70000
60000
50000
40000
30000
20000
10000
0