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Group 3.pptx

  1. 1. THE THEORY OF CONSUMER BEHAVIOR THE THEORY OF CONSUMER BEHAVIOR
  2. 2. 2 2 Utility refers to the degree of satisfaction per unit of consumption.
  3. 3. Cardinal Utility Theory developed over the years with significant contributions from different economists, notably Economist Alfred Marshall. 3 Cardinal Utility Theory KEY CONCEPTS Cardinal means that something can be measured in numerical terms Theory is a set of assumptions or collection of generalization. “QUANTIFIABLE” Utility refers to the level of satisfaction which could change according to the situation
  4. 4. 4 Utils refers to the unit of measurement for satisfaction Total Utility is the aggregate utility derived by a consumer after consuming all the available units of a commodity. Thus, it is the sum of all the utilities accruing from each individual units of the commodity Marginal Utility is the utility flowing from an additional unit of a commodity, over and above what had been consumed Saturation Point refers to the peak point of the total utility curve
  5. 5. 5 Total Utility and Marginal Utility Schedule
  6. 6. 6 Total Utility & Marginal Utility Curve
  7. 7. 7 LETS PRACTICE!!!
  8. 8. Law of Diminishing Marginal Theory states that as one consumes more and more of a particular good, additional or extra satisfaction decreases. Law of Diminishing Marginal Theory
  9. 9. Ordinal Utility Theory also called Indifference theory, states that utility is not measurable but can only be ranked or compared. in this theory, we assumed that people know what they like, their choice is consistent, and that they prefer more to less, But we also recognize that people having different perspectives. 9 Ordinal Utility Theory
  10. 10. 10
  11. 11. Indifference Curve shows different combinations of two goods that can be consumed that yield the same level of satisfaction or utility. 11 Indifference Curve
  12. 12. 12 Peter has 1 unit of food and 12 units of clothing. Now, we ask Peter how many units of clothing is he willing to give up in exchange for an additional unit of food so that his level of satisfaction remains unchanged. Peter agrees to give up 6 units of clothing for an additional unit of food. Hence, we have two combinations of food and clothing giving equal satisfaction to Peter as follows: 1. 1 unit of food and 12 units of clothing 2. 2 units of food and 6 units of clothing Combination • A • B • C • D Food • 1 • 2 • 3 • 4 Clothing • 12 • 6 • 4 • 3
  13. 13. 13 Indifference Map is a series of indifferent curve
  14. 14. Budget Constraint 14 Budget Constraint Budget Line It is a locus of points that shows different combinations of two goods that can be purchased given the same money income or budget It depicts the consumer choices between two products. Budget Function A mathematical equation showing various combinations of two goods that can be purchased given the same budget or income. Budget= PxQx+ PyQy
  15. 15. 15 Example: Given Px= 10, Py=20 and Budget (B)=200. The combination of good X and Y that can be purchased is determined by: Budget= PxQx+PYQy 200 = 10 Qx + 20 Qy
  16. 16. 16 Budget Schedule A list or table that shows various combinations of two goods that can be purchased given the same money income. Budget= PxQx+ PyQy Qx Qy A 0 10 B 4 8 C 10 5 D 16 2 E 20 0
  17. 17. 17 Qx Qy A 0 10 B 4 8 C 10 5 D 16 2 E 20 0 0 2 4 6 8 10 12 0 5 10 15 20 25 E D C Budget Line B A
  18. 18. Consumer Equilibrium The state of balance achieved by an end user of products that refers to the amount of goods and services they can purchase given their present level of income and the current level of prices. Consumer equilibrium allows a consumer to obtain the most satisfaction possible from their income. 18 Consumer Equilibrium
  19. 19. Theory of production & Cost Theory of production & cost
  20. 20. Production Function OUTPUT=f( inputs) The OUTPUT is dependent on or is a function of the factors of production or INPUTS used by the firm. Inputs can be found and classified into LAND, LABOR, CAPITAL, and ENTREPRENEUR. The production function has a DIRECT RELATION between input and output. 20 Production Function
  21. 21. Production Periods 22 Long-run period is a production period in which all the inputs used in production of the firm are variable inputs. Very short-run period or the immediate period is a production period in which all factors of production used by the firm are fixed inputs. Short-run period is a production period in which some inputs used by the firm are fixed while others are variable.
  22. 22. Law of Diminishing Marginal Returns Law of Diminishing Marginal Returns The law states that as successive units of variable inputs are added to fixed inputs, total product increases at an increasing rate, continuously increases at a decreasing rate and at a certain point total product declines.
  23. 23. 24 Total Product, Marginal Product and Average Product
  24. 24. Average Product (AP) is the total product per unit of the variable input. Formula: AP = TP / Labor 25 Marginal Product (MP) is the additional or extra product contributed by the last worker. Formula: MP = ∆TP / ∆L
  25. 25. 26 Law of Diminishing Marginal Returns and the Stages of Production
  26. 26. 27 The three stages of production are characterized by the slopes, shapes, and interrelationship of the total, marginal, and average product curves. Three Stages of Production Three Stages of Production
  27. 27. Stage of Increasing Returns Stage I arises due to increasing average product. As more of the variable input is added to the fixed put, the marginal product of the variable input increases. Most importantly, marginal product is greater than average product, which causes average product to increase. This is directly illustrated by the slope of the average product curve. 28 Stage of Negative Returns The onset of Stage III results due to negative marginal returns. In this stage of production, the law of diminishing marginal returns causes marginal product to decrease so much that it becomes negative. Stage of Decreasing Returns In Stage II, production is characterized by decreasing, but positive marginal returns. As more of the variable input is added to the fixed input, the marginal product of the variable input decreases. Most important of all, Stage II is driven by the law of diminishing marginal returns.
  28. 28. Economic Cost payment for the inputs that the firm uses in the production processes. 29 Economic Cost It does not only include those payments to outside to supply the inputs called explicit cost, but also the implicit cost The firm in order to produce the goods and services needs inputs like land, labor, capital, and entrepreneur which may be owned by firm itself or by consumers or household.
  29. 29. are monetary expenditures paid to outsiders who supply the inputs. are the cost of self owned or self employed resources. The valuation of the supposedly payment or income of the firm is important to be included because of the opportunity cost concept. Implicit Costs measures things that must be given up or sacrificed when one chooses one alternative over the other. Example: if you decide to quit from your job and run a business the salary you give up is the opportunity cost. 30 Economic Costs Opportunity Cost
  30. 30. Mathematical Definition of Cost Function The table shows that if the firm operates in the immediate period, all cost are fixed cost. PRODUCTION PERIOD TOTAL COST AVERAGE COST MARGINAL COST Immediate period TC=TFC AFC = TFC/Q ATC = TC/Q AFC = TFC/Q AVC = TVC/Q ATC = AFC+AVC Short-run period TC = TFC+TVC MC= ∆𝑇𝐶 ∆𝑄 Long -run period TC = TVC ATC = TC/Q AVC = TVC/Q AVC = ATC MC= ∆𝑇𝐶 ∆𝑄
  31. 31. 32 In the short-run, Total Cost (TC) for the firm includes Total Fixed Cost (TFC) and Total Variable Cost (TVC). If the firm operate in the long run period, TC = TVC, meaning all cost are variable
  32. 32. Variable Cost, and Total Cost for the Firm Total Fixed Cost, Total Variable Cost, and Total Cost for the Firm 33 Total Fixed Costs are costs that do not vary with output like rentals and their amount would be the same even if output is one unit or one million units. Total Variable Costs are costs that vary directly with output. It is rising as more is produced and falling as less is produced. Total Cost is the sum of the total fixed cost and total variable cost. TC= TFC+TVC
  33. 33. 34 Output Total Fixed Cost Total Variable Cost Total Cost Average Fixed Cost Average Variable Cost Average Total Cost Marginal Cost 0 10 0 10 - - - - 1 19 5 15 10 5 15 5 2 10 9 19 5 4.5 9.5 4 3 10 12 22 3.33 4 7.33 3 4 10 15 25 2.5 3.75 6.25 3 5 10 19 29 2 3.8 5.8 4 6 10 25 35 1.67 4.16 5.83 6 7 10 33 43 1.43 4.71 6.14 8 8 10 43 53 1.25 5.38 6.63 10
  34. 34. 35 The Different Cost Curves for Hypothetical Firm in the Short-run
  35. 35. Production Costs in the Long- Run 36 Production Costs in the Long- Run
  36. 36. 37 Economies of scale exists when long- run average costs decline as output rises, and larger firms will be more efficient than smaller firms. Diseconomies of scale are said to exist in the range where average costs rise with increases in output.

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