Economic Decision Making Using Cost Data

Chapter 3

Determining Relevant Revenues: Understanding the Buyer

The Law of Demand

1. Individual Demand

The previous chapter was devoted to a discussion of relevant revenues and costs. To maximize profits, firms must determine the changes in revenues (relevant revenues) associated with a given decision. Consumer choice theory can be very useful in helping managers to determine relevant revenues.

To understand consumer behavior, we have to recognize the role of opportunity cost. Consumers don’t have to buy from your firm. From their point of view, the price of your good represents opportunity cost: if they pay $100 to buy your good, they cannot spend it on other goods and services they may value. Thus, the consumer will weigh your good against ...