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Sample # 2
Major Economic Concepts – Consumer Utility and Demand
Utility –
the benefit f satisfaction that a person gets from the
consumption of a good or service is termed as utility. For instance
if someone consumes a drink, the satisfaction of the thirst being
quenched is its utility. However utility is an abstract theoretical
concept, and units if utility are chosen arbitrarily, just lie the
units is, which we measure temperature.
Marginal Utility
– is the additional utility derived from the last unit of a
good consumed. It is calculated as the change in utility that occurs
when one more unit of a good is consumed.
Utility Maximization – is the attainment of the greatest possible
utility. But a household’s income and the prices that it faces limit
the utility that it can obtain. We assume that a household consumes
in a way that maximizes its utility, taking into consideration its
income and the prices of goods in the market. Based on these issues
the consumer makes choices about
what to purchase and what not to purchase, and thus builds
preference maps of different combination that are then based on
price, preference and income.
Demand – The quantity demanded of a good or service is the amount that
consumers plan to buy in a given period of time. Demands are
different form wants. Wants are unlimited desires or wishes that
people have for goods and services. Demand however reflects a
decision about, which wants to satisfy. In other words, demands are
the wants backed by buying power. The relationship between the
quantity demanded of a good by an individual and its price indicate
individual demand, where as the relationship between a goods price
and its quantity demanded in general indicate
market demand.
Preferences – a ranking of likes and dislikes and the intensity of
those likes and dislikes. There are 3 basic assumptions in regard to
preferences: 1) Preferences do not depend on the prices of goods, 2)
Preferences do not depend on income, 3) More of any good is
preferred to less of that good.
The above three main concepts explained are interlinked in
that the wants of a person depend on the utility, which he can gain
from a product or a good or service, in order to satisfy a need.
However the demand for these goods depends on the preferences of a
person as they are backed by buying power. In other words the
rational human being will prioritize his preferences, according to
his buying power and then will develop the prioritized demands.
Based on these facts a preference ma can be created, which measures
the different combinations of two goods that the person prefers. One
good is placed on the horizontal and another on the vertical axis,
and then a curve is drawn that indicates the combinations of each
good as against the other, that are preferred at a given time.
Indifference Curve – an indifference curve is a line that shows all
different combinations of two goods among, which the consumer is
different. For an individual consumer there are generally more than
one indifference curves and they never intersect each other.
The result of an
amalgamation of all these concepts is that the consumer reaches a
state of consumer equilibrium. This is a situation in, which a
consumer has allocated his or her income in a manner that maximizes
utility. This also results in what is termed as the total utility
for the consumer. That is the final consumer equilibrium determines
the total utility, which is gained form all the goods that are in
that equilibrium. This occurs because consumers spend their income
in order to make marginal utility per dollar spent on each good
equal.
Diminishing marginal rate of
substitution in consumption (mrsc) between goods ‘x’ and ‘y’
– the marginal rate of substitution is the rate at, which a
person will up good ‘y’ in order to get more of good ‘x’ and at the
same time remain indifferent. The diminishing rate of marginal
substitution is the general tendency for the marginal rate of
substitution to diminish as the consumption move along an
indifference curve, increasing consumption of good x and decreasing
consumption of good y.
Income vs. Substitution Effects
– the
effect of a change in income on consumption is called the income
effect, and is positive for normal goods. The substitution effect is
the effect of a change in price on the quantities consumed when a
consumer remains indifferent between the original and the new
combinations of goods consumed.
Short-run vs. Long-run Production Theory
–
the short run production function shows how the
output rate of a given plant varies as the input of labor is varied.
As the amount of labor rises but the total labor input is small,
average and marginal product rise. According to the long run
production function the output varies and the long run cost varies
in relation to the efficiency of the plant size. As it is in the
long run that capital can be invested.
Marginal Product of Labor –
is the
increase in total product resulting from an increase in one unit of
labor.
Average Product of Labor –
is the
total product per unit of variable labor input.
Short-run average and marginal cost –
the short run marginal cost of the increase in total cost resulting
from a unit increase in output in the sort run. And the short run
average cost is the total cost per unit of output.
Long run average cost –
is the lowest
attainable average total cost when both capital and labor inputs can
be varied.
Reference:
1. Parkin, Michael, Economics,
1990, Addison-Wesley Publishing
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