Course: Principles of Microeconomics
Module 3: Consumer Behavior
Goals
After completing this module, you will be able to do the following:
⦁ Discuss price elasticity of demand and how it is calculated.
⦁ Explain the usefulness of the total revenue test for price elasticity of demand.
⦁ List the factors that affect price elasticity of demand and describe some applications of price elasticity of demand.
⦁ Describe price elasticity of supply and how it can be applied.
⦁ Apply cross elasticity of demand and income elasticity of demand.
⦁ Define and explain the relationship between total utility, marginal utility, and the law of diminishing marginal utility.
⦁ Describe how rational consumers maximize utility by comparing the marginal utility-to-price ratios of all the products they could possibly purchase.
⦁ Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model.
⦁ Discuss how the utility-maximization model helps highlight the income and substitution effects of a price change.
⦁ Give examples of several real-world phenomena that can be explained by applying the theory of consumer behavior.
⦁ Relate how the indifference curve model of consumer behavior derives demand curves from budget lines, indifference curves, and utility maximization.
⦁ Define behavioral economics and explain how it contrasts with neoclassical economics.
⦁ Discuss the evidence for the brain being modular, computationally restricted, reliant on heuristics, and prone to various forms of cognitive error.
⦁ Relate how prospect theory helps to explain many consumer behaviors, including framing effects, mental accounting, anchoring, loss aversion, and the endowment effect.
⦁ Describe how time inconsistency and myopia cause people to make suboptimal long-run decisions. Define fairness and give examples of how it affects behavior in the economy and in the dictator and ultimatum games.
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