Consumer choice (econ 101 midterm 2)
steep vs flat indifference curve
STEEP: the MRS is high. person is willing to give up a large quantity of A to get a bit more B. FLAT: MRS is low. In this case, the person is willing to give up a small quantity of A to get more B.
Can the good be a substitute?
Shape of the indifference curves reveals the degree of substitutability between two goods. LEONTIEF- goods that are perfect complements
Shutdown vs exit
Shutdown- short run decision to not produce, can't avoid fixed costs (still has to pay rent and doesn't lose what they would've lost but doesn't earn what they would've made off output) Exit- long run decision to leave for EVER!!!!! bye, nothing to pay not even fixed costs
Preferences, utility
The choice that an individual makes depends on her preferences—her likes and dislikes. Her benefit or satisfaction from consuming a good or service is called utility.
Total Utility
Total utility is the total benefit a person gets from the consumption of goods. Generally, more consumption gives more total utility.
indifference curve
curve showing consumption bundles that give consumer same level of satisfaction consumption pizza reduced, consumption Pepsi increase to keep me equally happy
the theroy of consumer choice measures...
measures the tradeoffs that people face: more of one good, less of another
shutdown price
minimum point of AVC curve (market price < shutdown price = shut down start up price = conditions change, firm re opens)
constrained spending
people buy less than they want, link between income and spending, measured on the Budget Constraint
optimum
point where the budget line and indifference curve touch best pizza/pepsi combo where the slope of the indifference curve = slope of budget constraint, where MRS = relative prices market price of good is value consumers place on that good
increase in income
relative price stays the same, new budget slope is the same, therefore it's a parallel shift of the budget constraint
Changes in relative prices effecting the budget line
rotate the budget line, increasing or decreasing consumption of the good whose price has changed - depending on preferences.
Income effect
shift of budget constraint, change in consumption when change in price moves consumer to higher or lower indifference curve
perfect complements
shoes 5 left, 7 right is just as valuable as 5 left 5 right indifference curves are right angles
Consumer Equilibrium
situation in which the consumer has allocated all of her available income in the way that maximizes her total utility, given the prices of available goods.
Diminishing Marginal Product
MP of input declines as quantity increases, making less and less, crowded
if making decision about savings
with substitution effect... save more money, if income... save less money
Production Function
relationship between quantity inputs to make good and quantity outputs to get that good output cookers, rise, y azis input labour, run, x axis
MC = ATAC
(free entry and exit makes P = ATC) (competitive firms means P = MC)... 2 measures of cost must equal each other
4 Properties of Indifference Curves
1. Higher indifference curves are preferred to lower indifference curves. 2. Indifference curves are downward sloping. 3. Indifference curves do not cross. 4. Indifference curves are bowed inward.
4 indifference curve properties
1. Higher indifference curves preferred to lower ones (more) 2. Indifference curves are downward sloping (rate that consumer is willing to substitute one good for another, one good reduces another incresaes) 3. Indifference curves do not cross (contradicts property 1) 4. Indifference curves bow inward because slope is the MRS
The Utility maximizing choice, 3 rules and equation
1. On the budget line 2. On the highest attainable indifference curve 3. Has an MRS that is equal to the relative price of the two goods. MRS = | PB/ PA | (Absolute value) this is the point at which ppl consume
3 features of a competitive market
1. many buyers and many sellers 2. goods offered by sellers are the same 3. firms can freely enter and exit the market (anyone can decide to start of leave the business, force in shaping the Long Run equilibrium!)
indifferent when
2 bundles suit taste equally well (2 pizza 1 pepsi or 2 pepsi 1 pizza)
Budget Equation
Expenditure= Income Call the price of Good A = PA, quantity of Good A = QA the price of Good B = PB the quantity of Good B =QB, and income= Y The budget equation is: PAQA + PBQB = Y rearranged to say that QA = Y/PA - (PB/PA)QB
increase in wage (labour supply)
If looking at income effect... increase in wage means work less (like winning lottery) and will make a backward slop if looking at sub effect, works more to make even more money, upward slope
Diminishing Marginal Rate of Substitution
MAJOR KEY in understanding consumer choice general tendency for a person to not be willing to give up good A to get one more unit of good B, ... while at the same time they remain indifferent as the quantity of good B increases.
comparing MR and MC...
MR > MC, increase quantity produced raises profit, but after equilibrium will reduce profit (MC > MR) MR < MC, reduce production, increase profit @ profit maximizing level, MR and MC are exactly qual, basically equilibrium! rational people think that the margin!
price is the same as...
MR and AR! price same regardless of quantity produced P is a horizontal line because the firm is a price taker
why are indifference curves not straight lines?!
MRS not the same (slope not constant) on all points of the curve depends how much pizza I already have... how hungry I am because of it equally happy on all indifference curve points but still prefer some to others
Y/Pa= PB/PA=
Y/PA is real income in terms of Good A. PB/PA is the relative price of Good A in terms of Good B.
Indifference curves... Points below and above the indifference curve
a line that shows combinations of goods among which a consumer is indifferent. For every level of total utility there is a new indifference curve. As you move away from the origin the level of total utility increases. All the points on the indifference curve are preferred to all the points below the indifference curve. All the points above the indifference curve are preferred to all the points on the indifference curve.
to derive supply curve for firms....
add the quantity supplied of every firm in the market
Average vs Marginal revenue
average revenue= TR, Quantity of output sold for all firms, average revenue= price of the good marginal revenue= change in TR from each additional unit sold, when Q rises of 1 unit, TR rises P dollars, MR= price of good in competitive market
What are consumption possibilities limited by?
by income, and relative prices between goods. When all income is spent, the consumer has reached the limit of her consumption possibilities.
Explicit costs vs implicit costs
explicit- input costs that require an outlay of money by the firm (firm sends money out) implicit- input costs that don't require sending money out (Hellen teaches herself computer, 100$ worth of her time) opportunity cost of financial capital
Diminishing Marginal Utility
decrease in marginal utility as the quantity of the good consumed increases
Deriving Demand curve
demand curve= quantity demanded of a good at a given price
Deriving the Demand Curve
derive the demand curve directly from the consumer possibilities curve. The key to doing this correctly is to hold the price of the y-axis good fixed and allow the price of the X AXIS GOOD TO INCREASE Combination between each new price and the new quantity of the good consumed maps out the demand curve. Note how the curve shifts now when either the price of the second good or income changes in the consumption diagram.
Economist vs. Accountant profts
economist looks at implicit and explicit costs and accountant just looks at explicit costs econ profit- TR - total cost accounting- TR - total explicit cost
efficient scale in LR
efficient scale= lowest ATC LR equilibrium of competitive market with free entry and exit have firms operating at efficient scale
short run assumption
factory= fixed workers= variable (quantity of cookies depends on number of workers)
at the end of the entry and exit process...
firms MUST be making economic profit! process of entry and exit ends when price and ATC are equal!
profit
firms total revenue, total cost what owner gets to keep, not needed cover costs
If indifference curves are less bowed...
goods are easy to substitute for each other PERFECT SUBSTITUTES: (nickels and dimes, 2 nickels= 1 dime, slop= 2, constant) straight line indifference curves
a firm will exit if...
if revenue it'd get from producing is less than total costs if TR < TC, P < ATC
Marginal product
increase in output from 1 additional unit of that output 3->4 workers, 50->90 output, MP = 40 (90-50)!
Changes in income effecting the budget line
increasing or decreasing consumption of the goods - depending on preferences.
if there's a decrease in price of pizza
make consumer better off :) income- buy more both, increasing purchasing power of their money sub- pepsi consumption more because it's cheap therefore definitely more pepsi and pizza is ambiguous
marginal rate of substitution is equal to....
marginal rate of substitution is equal to.... the ratio of the marginal utilities. MRS = MU B/ MU A (marginal utility of B/ Marginal utility of A)
Utility MAXIMIZING rule
marginal utility per dollar of Good A is MU A/PA . (Good B: MU B/PB, measured on x axis) utility maximizing rule is MUA/PA=MUB/PB
profitable vs not favourable market
market price < exit price, out of market P > ATC, profitable= enter like it's pretty common sense tbh
total cost
market value of inputs used in production, what firm pays to buy inpits
equation to maximize profit equation for total revenue <3
maximize profit: TR - TC Total revenue= p times q!!!! bish
slope of budget constraint
measures rate that consumer can trade 1 good for another, relative prices of 2 goods rise/run eg pizza costs 5 times as much as pepsi, opp cost of a pizza is 5 pepsi, slope of 5
substitution effect
movement along change in consumption when change in price moves consumer along indifference curve to a point with a new MRs
horizontal supply curve
new firms have no incentive to enter the market existing firms have no incentive to leave nothing changes or gets messed up
is there no profit with horizontal supply curve???
no, profit= TR - TC, compensates for owner's opportunity costs (if accountant were measuring, we would see profit on the diagram but economics accounts for opportunity costs).
normal vs inferior good
normal good: income rises, demand rises (positive) inferior good: income rises, demand decreases (negative relationship)
Budget Constraint
one end: buy all the pizza, no pepsi other end: but all the pepsi no pizza middle- exactly in middle, consumer spends an equal amount of money on both limit on consumption bundles consumer can afford
law of demand giffen good
price and quantity demanded neg related sloped upward when income effect is SO STRONG it exceeds sub. effect giffen good- increase in price raises Quantity demanded because income so strong
if company doubles the amount produced...
price remains TR doubles TR proportional to amount of output
profit on the graph and in an equation
profit= (P - ATC) x Q shaded in rectangle below P, touching ATC, maximizing profit= minimizing losses
Mc detmerines...
quantity of a good firm is willing to supply at any price (cost determines supply)
Cheaper price
steeper budget constraint slop expand consumer set of buying opportunities, fall in price shifts constraint outward (same idea as increase income because it's more money) (unless change in pepsi and spending all money on pizza so don't even notice)
Marginal Utility
the change in total utility that results from a unit-increase in the quantity of the good consumed. As the quantity consumed of a good increases, the marginal utility from it decreases.
A individual's budget line shows...
the frontier of consumption possibilities and is a function of PRICES and INCOME
Marginal Utility per dollar
the marginal utility from a good that results from spending one more dollar on it. reflects how buyers are choosing at the margin
Marginal Rate of Substitution (MRS)
the rate at which a person is willing to give up Good A to get an additional unit of Good B while remaining on the same indifference curve magnitude of the indifference curve's slope measures marginal rate of substitution.
Marginal Rate of substitution
the slope of the indifference curve, how much pepsi consumer requires to compensate for reduction in pizza
Anything that changes that budget line will correspondingly change...
the way that individuals consume.
