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3: Demand and Pricing

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    • 3.1: Theory of the Consumer
      Previously, we used a demand curve to represent the relationship between the price charged for ice cream bars and the maximum number of ice cream bars that customers would purchase. We will address how to create a demand curve later in this chapter, but we will begin our discussion with a brief review of microeconomic theory that endeavors to explain how consumers behave.
    • 3.2: Is the Theory of the Consumer Realistic?
      Strictly speaking, it would be difficult to make a case that the theory of the consumer conforms to our own experience of consumption decisions or what we observe of other consumers. We don’t consciously weigh the relative marginal utilities of tens of thousands of possible goods and services we might consume. We don’t know all the current prices and don’t even know of the existence of many goods and services.
    • 3.3: Determinants of Demand
      We can approach the challenge of modeling consumer behavior in a more practical manner that is informed by the theory of the consumer. To estimate demand and study the nature of consumer demand, we start by identifying a set of key factors that have a strong influence on consumer demand.
    • 3.4: Modeling Consumer Demand
      To develop a formal model of consumer demand, the first step is to identify the most important determinants of demand and define variables that measure those determinants. Ideally, we should use variables for which data exist so that statistical estimation techniques can be applied to develop an algebraic relationship between the units of a good consumed and the values of the key determinants.
    • 3.5: Forecasting Demand
      dentifying the key determinants of demand and developing demand functions gives a business manager a better understanding of his customers. A benefit of that understanding is an improved accuracy in forecasting the demand levels for their products and services in an upcoming period. Most businesses need to plan production activities well in advance of when the goods and services are actually provided to the consumer.
    • 3.6: Elasticity of Demand
      An alternative approach to measuring the sensitivity of demand to its determinant factors is to assess the ratio of percentage change in demand to the percentage change in its determinant factor. This type of measurement is called an elasticity of demand.
    • 3.7: Consumption Decisions in the Short Run and the Long Run
      Economists distinguish short-run decisions from long-run decisions. A consumer decision is considered short run when her consumption will occur soon enough to be constrained by existing household assets, personal commitments, and know-how. Given sufficient time to remove these constraints, the consumer can change her consumption patterns and make additional improvements in the utility of consumption.
    • 3.8: Price Discrimination
      In economics, the term for charging different prices to different customers is called price discrimination. Economists have actually defined multiple types of price discrimination, called first-degree price discrimination, second-degree price discrimination, and third-degree price discrimination.

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