Consumer Demand as One of the Essentials

¶ … consumer demand as one of the essentials of economics. Shiller's explanation of consumer demand is centered on providing reasons for the tendency of demand curves to flow downward, explaining price elasticity of demand measures, and showing the relationship between price, price elasticity, and total revenue. The other aspects, which form the learning objectives of the chapter, are factors affecting price elasticity and the impact of advertising on consumer demand.

The study of consumer demand begins with an observation and analysis of patterns of consumption based on how consumers spend their earnings. Based on the findings of the author's analysis, nearly 50% of all consumers spending are directed toward food and shelter. In addition, a typical household budget includes housing, health, and transportation expenses. However, consumers tend to change their spending behaviors and habits on occasion due to various factors such as recession and changes in income and prices. Consumer behavior is also explained by different perspectives that act as the determinants of demand i.e. The sociopsychiatric perspective and the economic perspective. The sociopsychiatric perspective associate consumer behavior with the pursuit to satisfy basic desires for ego, sex, and security satisfaction as well as the desire for recognition among masses. The economic perspective states that patterns of consumer spending are influenced by a collection of the individual's demands such as income, tastes, expectations, price, and availability (Shiller, 2009, p.82).

The reason for the tendency by demand curves to slope downward is explained through the utility theory in which economists believe that consumer tastes are by-products of cultural and socipsychiatric factors. While economists never examine the origin of those tastes, they proceed to analyze the impact of those tastes on consumption decisions. Utility is a term used by economists to refer to the anticipated satisfaction or pleasure received from products and services. The downward slope of the demand curve is attributed to the decline in marginal utility, which makes consumers to buy large quantities of a product only at lower prices.

With regards to price elasticity, Shiller (2009) states that there is need for more specific information though the theory of demand explain consumer spending patterns (p.86). Price elasticity is usually determined by the response of consumers to any changes in price, which is measured by the price elasticity demand. This is simply defined as the percentage change in quantity demanded vs. The percentage change in price (Shiller, 2009, p.87). Price elasticity can be inelastic if the demand does not react much to the changes in price or elastic if the demand changes significantly when prices change ("Elasticity," n.d.). Generally, price elasticity is used to examine the sensitivity of demanded quantity in light of changes in price.

There is a significant relationship between price elasticity, price, and total revenue when examining consumer demand. Price elasticity is a concept developed to refute the common misconception that manufacturers charge the highest price possible for their products. The relationship between price and total revenue is that price determines the quantity of the product sold and the amount of money a seller will receive from the product. Price elasticity plays a crucial role in determining total revenue depending on whether the price of the product contributes to elastic or inelastic demand. Price elasticity is influenced by various factors such as availability of substitutes, necessities vs. luxuries, and price relative to income.

The other important element in consumer demand is advertising, which plays a crucial role in consumer spending patterns. Advertising influences consumer demand by changing consumers' tastes through providing information regarding existing products, introducing new products to the market, and exploiting consumers' senses and lack of knowledge.

Summary of Chapter 5:

In attempts to explain supply decisions, this chapter focuses on five different aspects that are related to this concept. The learning objectives of the chapter include understanding the meaning of the product function, describing the law of diminishing returns, and showing the difference between production and investment decisions. This section also seeks to explain the difference between accounting costs and economic costs and demonstrate the nature of fixed, variable, and marginal costs.

A supply decision is described as an expressed willingness and ability to manufacture a product at varying prices (Shiller, 2009, p.99). This concept is a by-product of the question of the quantity of products that can be produced and the question of what quantity should be produced. Therefore, production is an important element for understanding a supply decision because of its role in determining the availability and price of products and services in the market. While the production process is influenced by several major factors, the most essential question in this process is the quantity of resources needed to product a specific good. This question is answered by the production function, which shows the link between inputs of capital and labor and the outputs of products and services (McGahagan, n.d.). In essence, the production function reveals the maximum quantity of producible goods in light of combination of various input factors.

The production function is based on efficiency, capacity, marginal physical product, and law of diminishing returns. The law of diminishing returns states that the marginal physical product of any production or manufacturing factor such as labor will start to decline at some point as it's increasingly used in a particular production setting. This implies that the marginal physical product of any variable input reduces with increased use with a specific quantity of fixed inputs. It's also known as the law of variable proportions since it's an actual generalization made by economists regarding the nature of technology despite the possibility to merge similar production factors in different portions to produce the same product (Johnson, n.d.).