Understanding Consumer Behavior Marianne Castro

Chapter 4:
Techniques for Understanding Consumer

Demand and Behavior
Economics for Managers by Paul Farnham
Presented by: Marianne C. Castro
Getting Information About Consumer Behavior
1. Expert Opinion
- Marketing consultants, Dealers, Suppliers and etc.
2. Consumer Surveys
- Directly asking consumers question about their response
3. Test Marketing and Price Experiments

- Important in analyzing consumer reaction to
new products
4. Analyses of Census and Historical Data

5. Unconventional Methods
Managerial Rule of Thumb:
Analyzing Consumer Behavior
Managers must consider
1. Whether the participating groups are

truly representative of the larger
population
2. Whether the answers given in these

formats represent actual market
behavior
3. How to isolate the effect of different

variables influencing demand
Economic Approaches to Consumer Behavior
Relationship Between One Dependent

and One Independent Variable:
Simple Regression Analysis
Figure 4.1 hypothetical Demand for Oranges

Economic Approaches to Consumer Behavior

is a statistical technique that provides an equation for
the line that “best fits” the data.
Cross-sectional data
Data collected on a sample of individuals with
different characteristics at a specific point in time.
Time-series data
Data collected on the same observational unit at a
number of points in time.
Panel data
Cross-sectional data observed at several points in
time.
and One Independent Variable:
negative relationship between the variables
Price Quantity Price Quantity

Demanded or Demanded
Relationship Between One Dependent and One Independent Variable:
Simple Regression Analysis Linear demand relationship can be
Quantitative Measure
shown as this equation 4.1:
Q = a - bP
Where:
Q = the quantity demanded

a = vertical intercept
b = the slope of the line = Q /P

P =price

The estimated value of the intercept term is
210.444, while the estimated value of the
price coefficient is –1.578. The demand
relationship is shown in Equation 4.2:
Q = 210.444 – 1.578P
The price coefficient, –1.578, shows that the quantity
demanded of oranges decreases by 1.578 pounds for
every one cent increase in price.
Equation 4.3 shows that the demand for oranges is

slightly price elastic using the average values of the data
in this sample. The percentage change in the quantity
demanded of oranges is slightly greater than the
percentage change in price.
Relationship Between One Dependent and Multiple
Independent Variables: Multiple Regression Analysis
We use multiple regression analysis
to estimate the demand function in
Equation 4.5. Each coefficient shows this effect while statistically holding
constant the effect of the other variable. Thus, using
Q = a - bP + cADV multiple regression analysis to estimate demand
relationships from behavioral data solves the “all else held
Where: constant” problem by statistically holding constant the
Q = the quantity demanded effects of the other variables included in the estimating
a = constant term equation.
b = coefficient of price variable = Q /P
P =price
C = coefficient of advertising variable t:.Q/t:.ADV,
ADV = advertising expenditure
The demand relationship estimated in Table 4.2 is shown in Equation 4.6,
using the variables defined in Equation 4.5.
4.6 Q =116.157 - 1.308P + 11.246ADV
The difference arises from the fact that Equation 4.6 includes
advertising expenditure, so that this equation shows the effect of
price on quantity demanded, holding constant the level of
and Multiple Independent Variables:
advertising. Because no other variables are held constant in
Multiple Regression Analysis
Equation 4.2, the price variable coefficient in that equation may pick
up the effects of other variables not included in the equation that
also influence the quantity demanded of oranges. This result is likely
to occur if there are other excluded variables that are highly
correlated with price. Thus, it is important to have a well-specified
estimating equation based on the relevant economic theory.
Using the average values of price, quantity demanded, and advertising
expenditure, we calculate the price elasticity of demand in Equation 4.7
and the advertising elasticity in Equation 4.8.
Managers must realize that econometric results can vary with the
specification of the demand equation. All relevant variables need to be
included in these equations to derive the most accurate empirical
results.
Figure 4.5 log-linear Demand Curve has

a constant price elasticity everywhere
along the curve
Managerial Rule of Thumb:
Using Multiple Regression Analysis
✓ Manager must decide which

variables to include in an analysis
✓ Problems can arise if relevant variables
are excluded or irrelevant variables are
included
✓ Choice of variables comes from
✓ Economic theory
✓ Real-world experience
✓ The problem under consideration
✓ Common sense
As a manager it is imperative to understand what the consumer ‘s
Summary expectations are from a product, and how he will react to a marketing
initiative taken by you or your team. To understand consumer’s reaction,
one must consider various factors that influence the consumer’s mindset
– both, within our control and the ones not under our control.
consumer behavior and demand for different products:

(1) marketing and consumer research methods that include
surveys, experiments, and test marketing;
(2) statistical and econometric approaches to formally
estimating demand relationships.
Managers tend to favor the former approach, while economists in

business and academia use the latter. Most of the data for
econometric analyses, however, are derived from consumer
research studies. We have suggested that managers be familiar
with both approaches because each provides useful information
on consumer behavior.
THANK YOU
Any Question?
Presented by: Marianne C. Castro

References
Paul G. Farnham: Economics for Managers Third Edition
https://www.pearson.com/us/higher-education/program/Farnham-Economics-
for-Managers-3rd-Edition/PGM9672.html
Consumer Behavior: https://www.slideshare.net/dbodhe/consumer-behavior-

final-31164131?fbclid=IwAR0-tgOtMxuh3JWrNudgO7n6SPde5qnvIq1WT-
pwCGN5SX4aitzpNAs-zjU
Business 2 Community: https://smallbusiness.yahoo.com/advisor/resource-

center/5-steps-decision-making-process-194509349/
Irfanullah Jan, ACCA : Consumer Behavior and last modified on Mar 30, 2019
https://xplaind.com/243932/consumer-behavior

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Chapter 4:

Techniques for Understanding Consumer

3. Test Marketing and Price Experiments

4. Analyses of Census and Historical Data

1. Whether the participating groups are

2. Whether the answers given in these

3. How to isolate the effect of different

Relationship Between One Dependent

Figure 4.1 hypothetical Demand for Oranges

Simple Regression Analysis

Figure 4.1 hypothetical Demand for Oranges

negative relationship between the variables

Price Quantity Price Quantity

Q = the quantity demanded

b = the slope of the line = Q /P

Figure 4.1 hypothetical Demand for Oranges

Equation 4.3 shows that the demand for oranges is

4.6 Q =116.157 - 1.308P + 11.246ADV

Figure 4.5 log-linear Demand Curve has

✓ Manager must decide which

consumer behavior and demand for different products:

Managers tend to favor the former approach, while economists in

Presented by: Marianne C. Castro

Consumer Behavior: https://www.slideshare.net/dbodhe/consumer-behavior-

Business 2 Community: https://smallbusiness.yahoo.com/advisor/resource-

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