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.