top-rated free essay

economy

By Ang-Ka Kuang Sep 23, 2014 1038 Words
Principles of Microeconomics
(ECO2103)
Diploma in Business Administration
Mehdi Tasaloti

mehdi.tasaloti@newinti.edu.my

Faculty of Business,
Communication & Law (FOBCAL)
INTI International University
August 2014 Session

Faculty of Business, Communications and Law
INTI International University

1

Class syllabus for Long semester
Week

1-3
4-6

Topic

Economics Concepts, Issues & tools
Price Theory ( Demand & Supply) / Individual
assignment/ Test 1

7&8

Applications of Price Theory ( Elasticity)/
Group assignment
9
Theory of Consumer behavior
10
Market Failure & Externalities
11&12 Theory of Firm: Production and Costs / Test 2
13 & 14 Market Structures

Faculty of Business, Communications and Law
INTI International University

2

Topic 4:

Theory of Consumer Behavior

Faculty of Business, Communications and Law
INTI International University

3

Introduction
o The CONSUMER is essential to the
market. Understanding how the
consumer makes his/her purchasing
decisions is key.
o Individual consumption decisions are
made with the goal of maximizing total
satisfaction from consuming various
goods and services

Faculty of Business, Communications and Law
INTI International University

4

What is Utility?
Why do you buy the goods and services you do? It must be
because they provide you with satisfy. You feel better off
because you have purchased them. Economists call this
satisfaction utility.
Benefits that consumers obtain from goods & services they
consume is utility.
Utility = Satisfaction/Happiness/Pleasure one gets from
consuming a good.
Utility is difficult to quantify, as it differs between people and situations
Measured in “utils”

Faculty of Business, Communications and Law
INTI International University

5

Total Utility (TU)
If we could measure utility, total utility would
be the number of units of utility that a
consumer gains from consuming a given
quantity of a good, service, or activity during
a particular time period. The higher a
consumer’s total utility, the greater that
consumer’s level of satisfaction.
Marginal Utility (MU)
The amount by which total utility rises with
consumption of an additional unit of a good,
service, or activity, all other things
unchanged, is marginal utility.
Faculty of Business, Communications and Law
INTI International University

6

• Total Utility (TU)
Total amount of satisfaction or pleasure a
person derives from consuming a given
quantity of that product

• Marginal Utility (MU)
The extra satisfaction a consumer derives
from one additional unit of that product.
In other words, the change in Total Utility
that results from the consumption of one
more unit
MU = ΔTU/ΔQ

Faculty of Business, Communications and Law
INTI International University

7

(1)
Tacos
Consumed
Per Meal

0
1
2
3
4
5
6
7

(2)
(3)
Total Marginal
Utility, Utility,
Utils
Utils

0
]
10
]
18
]
24
]
28
]
30
]
30
]
28

10
8

Total Utility (Utils)

Total Utility
30
TU
20
10
0

6

0
-2

Faculty of Business, Communications and Law
LO1
INTI International University

Marginal Utility (Utils)

2

2

3

4

5

6

7

1

4

1

2

3

4

5

6

7 MU

10
8
6
4
2
0
-2

8

6-8

Law of diminishing Marginal Utility
Suppose that you are really thirsty and you
decide to consume a soft drink. Consuming the
drink increases your utility, probably by a lot.
Suppose now you have another. That second
drink probably increases your utility by less
than the first. A third would increase your
utility by still less. This tendency of marginal
utility to decline beyond some level of
consumption during a period is called the law
of diminishing marginal utility

Faculty of Business, Communications and Law
INTI International University

9

Law of diminishing Marginal Utility
The principle that as more of any
good or service is consumed, its extra
benefit declines
Increases in total utility from
consumption of a good or service
become smaller and smaller as more
is consumed during a given time
period.

Faculty of Business, Communications and Law
INTI International University

10

The Budget Line
Consumer’s choices are limited by the budget available. Total spending for goods and services can fall short of the budget constraint but may not exceed it. Suppose a college student, Rocky, wants to go in for Music classes and Karate classes. A day spent pursuing either activity costs $50. Suppose he has $250 available to spend on these two activities each semester.

Faculty of Business, Communications and Law
INTI International University

11

A change in consumer income and the budget line
If consumer income increases then the consumer will be able to purchase higher combinations of goods. Hence an increase in consumer income will result in a shift in the budget line. This is illustrated in Figure . Note that the prices of the two goods have remained the same, therefore, the increase in income will result in a parallel shift in the budget line.

Faculty of Business, Communications and Law
INTI International University

12

A change in the price of a good and the budget line
If income is held constant, and the price of one of the goods changes then the slope of the curve will change. In other words, the curve will pivot. This is illustrated in Figure below.

Faculty of Business, Communications and Law
INTI International University

13

Optimizing Consumption Choices
Or
Utility Maximization
A consumer’s money income
should be allocated so that the
last dollar spent on each good
purchased yields the same
amount of marginal utility
(when all income is spent),
because this rule yields the
largest possible total utility.

Faculty of Business, Communications and Law
INTI International University

14

Optimizing Consumption Choices Or
Utility Maximization
The rule of equal marginal utilities per dollar spent:
A consumer maximizes personal satisfaction when
allocating money income in such a way that the last
dollars spent on good A, good B, good C, and so on,
yield equal amounts of marginal utility.
MU of good A
MU of good Z
MU of good B
=
= ... =
Price of good A
Price of good Z
Price of good B

Faculty of Business, Communications and Law
INTI International University

Mehdi Taslaoti

15

Optimizing Consumption Choices Or
Utility Maximization
• Consumer allocates income so that the marginal utility per dollar spent on each good is the same for all commodities
purchased

MU X MUY
=
PX
PY

Faculty of Business, Communications and Law
INTI International University

16

End of Topic 4

Faculty of Business, Communications and Law
INTI International University

17

Cite This Document

Related Documents

  • central problems of an economy

    ...Central problems of an economy http://www.preservearticles.com/201103104450/problems-of-an-economy.html The world around us is at work. The basic aim of man is to earn an income in exchange of his service. Wants prompt people to work for the satisfaction of wants. Human wants are unlimited. But a particular want in satiable. The cycle of ...

    Read More
  • Role of Insurnce in development & growth of economy

    ...Role & Contribution of Insurance Sector Including Insurance Brokers (intermediary) in the Development & Growth of an Economy & Employment in any Country! Executive Summary: The aims of any economic planning are to produce a competitive environment to promote employment and sustainable long-term growth. This paper demonstrates that the insur...

    Read More
  • The Economizing Problem - and Its Direct Effect on the Economy at Large. a Short Essay from Islamic Perspective by Mustafa Aydemir V0.4

    ...Student Name: Mustafa Aydemir Student ID: 1200279 IE1001 Assignment in Islamic Economics - Short Essay No 1 by Mustafa Aydemir - Version 0.4.doc -1-   Bismillahirrahmanirrahim The economizing problem - And its direct effect on the economy at large. A short essay from Islamic perspective by Mustafa Aydemir Human beings are greed...

    Read More
  • Market Economy And Command Economy

    ...INTRODUCTION This report focuses on two systems of economy, that is Market economy and Command economy. Basically there are four types of economy: Traditional Economy: As the word says, Traditional economy is an economic system in which traditions, customs and beliefs of the economy guides the production of goods and services. Command Econo...

    Read More
  • Free Market vs Command Economy

    ...Free Market vs Command Economy ! In every government and organization, there has to be some sort of plan to organize transactions between people and companies in order to prosper. The Free Market and the Command Economy are two ways the world plans and organizes their economic system. Each have their own benefits and disadvantages and everyone...

    Read More
  • The Network Economy: New Economy

    ...[pic] THE NETWORK ECONOMY The Network Economy The history of economics of the Industrial Revolution since its beginnings is based on growth. Growth of people meant more customers and growth of production, which lead to growth in profits. This so-called “old” or traditional economy was based on bulk production, demanding large ...

    Read More
  • The Purpose of the Different Economies in Our Society

    ...the Different Economies in our Society” Raquel Moss Mr. George L. Edwards July 20, 2012 The Purpose of the different economies is so that society is able to answer the three questions: what, how and who to produce to. Because we live in a society full of scarcity, we face the economic problems of limited economic resources with that...

    Read More
  • keynes theory and classical economy

    ... This essay will compare the relationship between saving and investment of two schoolers view, which is Keynes and Classical economist view. In great depression Keynes argued with classical economist view of relationship between saving and investment. The key theory of Keynes is that the real consumption depends on disposable income. This the...

    Read More

Discover the Best Free Essays on StudyMode

Conquer writer's block once and for all.

High Quality Essays

Our library contains thousands of carefully selected free research papers and essays.

Popular Topics

No matter the topic you're researching, chances are we have it covered.