Lecture Theory of consumer choice. Production and the marginal product. Topic 3a Theory of consumer choice icon

Lecture Theory of consumer choice. Production and the marginal product. Topic 3a Theory of consumer choice




НазваниеLecture Theory of consumer choice. Production and the marginal product. Topic 3a Theory of consumer choice
Дата конвертации25.06.2013
Размер445 b.
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Lecture 3. Theory of consumer choice. Production and the marginal product.


Topic 3a

  • Theory of consumer choice



Outline of the presentation (Topic 3a)

  • Total and marginal utilities (TU & MU)

  • The law of diminishing marginal utility

  • Determinants of consumer choice

  • The rule of utility maximization

  • Marginal utility and the demand curve’s down-sloping

  • Budget restraint and the indifference curve

  • Consumer’s point of equilibrium and the demand curve



Total and marginal utilities [1]

  • UTILITY (корисність) – “The pleasure or satisfaction derived by an individual from being in a particular situation or from consuming goods or services.”



Can utility be measured?

  • Cardinal (absolute) utility?

  • Ordinal (relative) utility?



Use versus utility

  • Apples and oranges?

  • Candies and ice-cream?

  • Sad movies and soap operas?

  • Cigarettes and narcotic drugs?



Total and marginal utilities [2]

  • ^ TOTAL UTILITY (загальна корисність) – “…total amount of satisfaction or pleasure a person derives from consuming some specific quantity of a good or service.” (C.McConnell, S.Brue)



Total and marginal utilities [3]

  • ^ MARGINAL UTILITY (гранична корисність) – “…the extra satisfaction a consumer realizes from an additional unit of a product.” (C.McConnell, S.Brue)

  • MARGINAL UTILITY – “…the change in total utility resulting from the consumption of one more unit of a product.” (C.McConnell, S.Brue)



Total and marginal utilities [4]

  • MUn =TUn –TUn-1

  • n – number of consumed goods/services

  • MU – marginal utility (гранична корисність)

  • TU – total utility (загальна корисність)



The law of diminishing marginal utility*

  • Each extra unit of a commodity consumed lets consumer gain less satisfaction that the previous one.

  • Every extra unit of a good or service consumed within a relatively short period of time brings less utility than the previous one:

  • MUn < MUn-1

  • *Ukr: Закон спадної граничної корисності



The law of diminishing marginal utility “in action”



Determinants of consumer choice

  • Rational behavior

  • Tastes and preferences

  • Budget constraints

  • Prices



The rule of utility maximization

  • The total utility will be the greatest possible if each hryvnia spent on the last item of each good or service brings the consumer equal utilities:

  • MU1/P1 = MU2/P2 = … = MUn/Pn



Marginal utility and the demand curve’s down-sloping

  • The lower the price, the lower the utility that can offset the consumer’s expenditures, and thus the greater the quantity of goods he consumer will buy.



Budget restraint and the indifference curve

  • Budget restraint line is a straight line.

  • Indifference curve is a curve because of the law of diminishing marginal utility.



Consumer’s point of equilibrium and the demand curve

  • Consumer’s equilibrium is reached in the point of tangency between the budget restraint line and an indifference curve.



Topic 3b

  • Production and the marginal product



Outline of the presentation (Topic 3b)

  • Production function

  • Total, average and marginal products

  • The law of diminishing marginal productivity

  • Isoquants

  • Leontieff’s production function

  • Neoclassical production function

  • The marginal rate of substitution



Production function

  • Production function (виробнича функція) equation (a mathematical expression ) that reveals relationship between output and inputs needed to create that output.



Total, average and marginal products

  • Total product (загальний продукт) is the total output produced with a combination of certain quantities of inputs.

  • Average product (середній продукт) is the total output divided by the quantity of the input.

  • Marginal product (граничний продукт) is the output produced as a result of applying an incremental unit of input.



The law of diminishing marginal productivity

  • After some point, the more of a variable input is added to a certain fixed input, the lesser the additional output will be obtained.



Isoquants

  • Isoquant, isoquant curve, (ізокванта) is a curve representing different combinations of factors (inputs) resulting in the same amounts of output.



Neoclassical production function



Leontief’s production function



Wassily Leontief, 1906-1999



Marginal rate of substitution [1]

  • Marginal rate of technological substitution (MRTS) (граничний коефіцієнт технологічного заміщення) is a ratio of a unit of one input (A) we add to the amount of another input (B) we give up for the sake of using the unit of the input A, the output remains the same.



Marginal rate of substitution [2]

  • Graphically, MRTS determines the slope of the isoquant.

  • Replacing one input with another means movement from one point of the isoquant to another, provided the output remains the same.

  • Changes in output result in shifting to another isoquant.



Дякую за увагу! Thank you for attention!





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