Consumer Behavior

Week 3: We examine Consumer Behavior, and so please read Chapters 5 and 6.

A key thing to keep in mind is that economists can understand and predict the behavior of groups much better than the behavior of individuals.   A narrow focus is typically a matter of psychology, and the field of Behavioral Economics is the intersection of economics and psychology, to put it simply.  Also keep in mind that people make economic decisions based on a lot of different factors, which are called the "determinants of demand," so while price is often important in consumer behavior, other factors such as income, the price of other things, and expectations about the future, are also important.    The professional field that involves the economics of consumer behavior, along with some psychology, is called Market Research.   

What factors are important for a specific market?  Remember that a market exists in time and space, so the market for apples, or hotel rooms, or automobiles, or computers, or whatnot differs first with respect to the timing and location.  

About income as a determinant of demand, Family Dollar store locations tend to be in low to moderate income areas, while polo and fox hunting facilities tend to be in upper income communities.   So Beverly and Salem (moderate income communities) have Family Dollar stores, and Hamilton (upper income) has the Myopia Polo and Myopia Hunt Clubs.  So you can imagine that Family Dollar's location strategy -- based on understanding income elasticity of demand -- avoids placing stores in communities like Hamilton.  (If you drive through Hamilton on the way to Endicott College, you might catch the huntmasters, riding horses in red uniforms, along with a pack of beagles.)

Some other products happen to be linked to income, for example, frozen fish is more popular in low to moderate income communities.  Ramen noodles are a stereotypical meal choice for poor college students.  Macaroni and cheese in a package, is another.  But imagine that income increases, and demand for frozen fish, ramen noodles, and packaged mac and cheese declines, for most people.  These are "inferior goods," which only means that the responsiveness to increased income is lower demand.  (So nothing intrinsically "bad" about inferior goods.)   

In contrast, for many goods that consumers buy, they just buy more as their income increases, and are called "normal goods."  Ironically, this has created a “first world problem” in the US, with many middle income consumers running out of space, having to rent space, and hire organizing consultants.  (Such as Marie Kondo, and her Netflix "Tidying Up" show.)     We will explore this some more in this week's online Discussion forum.  

Another important determinant of demand is Expectations.   People make informal predictions about the future all the time.  We might expect that an item will be available next week, next month, or might worry that it will sell out, so we buy it today. (That is common when people are buying things like concert tickets, which often sell out.) We also might expect that the price of an item will increase or decrease.  That is why we see businesses implementing a sale or promotional price, or a limited time only promotion, to create expectations about price. 

Finally, keep in mind that demand is not totally independent.  In other words, the tastes, preferences, and buying preferences  of one consumer affect other consumers. This is often a "big deal" with kids in middle school and high school, who "must" have the right clothes, to fit in with their classmates.    But this is true for adults as well, and "conspicuous consumption," or "keeping up with the Jones’s," in an attempt to display economic status or power or prestige is fairly common.