Households and Individuals: “Consumers”

Economists assume that individuals maximize utility. Utility refers to satis- faction and enjoyment from the consumption (today or in the future) of a particular good or service. The economic analysis of utility examines why particular choices are made. For example, declining network viewership is readily explained in terms of microeconomic theory of consumer choice, and the increasing range of choices.

Consumer choice is a broader consideration than comparison of substi- tutes. Not only does it consider such questions as “Why do I purchase CDs instead of audiocassettes?” but also “Why do I not buy a large-screen TV even if I can afford one?” There are two key attributes to answering questions relating to choice and demand for particular items: resources and individual preferences.

Resources generally refer to purchasing power. Individuals generate purchasing power from their assets—marketable skill sets produce wages and salaries, financial assets yield interest and dividends, and other assets such as real estate and businesses yield profits (or losses). The returns from our various assets are determined in the labor and financial markets and in the fortunes of businesses directly owned.

As defined, resources include the stock of assets owned and the flow of income they generate. This means that an individual’s purchasing power in- cludes the possibility of spending all financial and business assets (and possibly borrowing against future earnings) in any one period, and having only wages and salary income in future periods. That possibility is present, and, given a presumption of the desirability of free choice, should be. The key point is that preferences are the province of individuals. This is not in- consistent with “rational-person” economic behaviors. In the full and rig- orous development of the economics of choice, rational behavior requires only decisions consistent with economic scarcity, not a particular set of preferences. Rational economic behavior has individuals always preferring more income to less, and not paying higher prices than necessary for pure substitute packages of goods and services.

Economists have an equilibrium condition for the optimal outcome of individual purchase decisions whereby the last (i.e., marginal) dollar spent on each different type of good and service (“i,” “j,” “k,” etc.) generates the same “marginal utility.” Expressed formally, with each MUi indicating the marginal utility from the consumption of an additional unit of good “i,” and Pi indicating the price of that unit:

1. AN INTRODUCTION TO MEDIA ECONOMICS THEORY AND PRACTICE

MUi MUj MUk

= = = for all consumption choices (i, j, k, etc.)

Pi Pj Pk

Given that the marginal utility from the last unit of a particular good or service declines as more units are purchased, typically additional units will 21

be purchased only if the price declines. Given the equilibrium condition expressed in the equation just given, for individual consumers there will be

a “downward-sloping” demand curve for any particular good or service. Starting from a given optimal position, more will be purchased only if the price declines. This relationship is depicted in Fig. 1.1.

Although preferences vary from one individual consumer to another, the “law” of diminishing marginal utility applies to all consumers and the aggregate demand relationship for a particular good or service at a particular point in time will also be downward sloping. It will have the same gen- eral shape as the individual demand curve in Fig. 1.2 although the scale units on the X-axis will be different—perhaps thousands or millions rather than single-digit numbers.

As in all areas of marketing, the downward sloping demand curve relationship provides many insights into the operation of media industries. Al- though we have couched the discussion in terms of consumer demand, the cost analysis relating to firms’ maximizing decisions means that the demand for inputs into the production and marketing process is also downward sloping. For example, in softening markets for advertising, the networks are able to place “floaters” (advertisements that can be, within limits, aired at a time of the network’s choice) only by substantially reduc-

FIG. 1.1. Individual consumer’s downward sloping demand curve.

20 OWERS, CARVETH, ALEXANDER

FIG. 1.2. Aggregate market’s downward sloping demand curve.

ing the rate. In the 1990s, some print advertisers began to face competition from Internet advertisers (see chap. 5, this volume).

Households and Individuals: “Consumers”