Consumption and Consumer Society 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

Utility theory: Utility function 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

Utility theory

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

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 Different levels of utility

A formal theory of consumer behavior Utility maximization

A formal theory of consumer behavior Response to a price change

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/