Economics GEN 3198 - Topic 3.pptx

Fundamentals of Economics GEN 3198 Topic 3 BBA 4 Topic 3: Microeconomic behaviour 1.Consumer Demand - Utility: the pleasure or satisfaction obtained from goods and services. - Total utility: the amount of satisfaction obtained from the entire consumption of a product. - Marginal utility: the amou...

Fundamentals of Economics GEN 3198 Topic 3 BBA 4 Topic 3: Microeconomic behaviour 1.Consumer Demand - Utility: the pleasure or satisfaction obtained from goods and services. - Total utility: the amount of satisfaction obtained from the entire consumption of a product. - Marginal utility: the amount of satisfaction you get from an additional unit of a good/service. Topic 3: Microeconomic behaviour Law of diminishing marginal utility: states that each successive unit of a good consumed produces less additional utility. - Applies to short periods of time. - Is not a universal law – exceptions. - Law of demand. Topic 3: Microeconomic behaviour • Price Elasticity of Demand: measures the response of consumers to a change in price. • = : Elastic Demand : Unitary Elastic Demand : Inelastic Demand Topic 3: Microeconomic behaviour • Price elasticity and total revenue. Total Revenue: the amount of money received by a seller from product sales. TR = PxQ P pm --------------Q Topic 3: Microeconomic behaviour Determinants of Elasticity: • Necessities versus Luxuries Demand for necessities are relatively inelastic. • Availability of substitutes The greater the availability of substitutes the higher the price elasticity of demand. • Price relative to income The price of the product in relation to consumer income. Topic 3: Microeconomic behaviour 2. Supply Decisions Time frame: - Short Run: The period in which the quantity of some inputs cannot be changed.  Fixed inputs  Variable inputs - Long Run: A period of time long enough for all inputs to be varied.  Variable inputs Topic 3: Microeconomic behaviour a) Costs of Production - Total costs (TC): the market value of all resources used to produce a good or service. - Fixed costs (FC): the costs of production that do not change when the rate of output is altered. - Variable costs (VC): the costs of production that do change when the rate of output is altered. Topic 3: Microeconomic behaviour TC Fc Vc Tc VC FC FC------------------------ Q Q TC = FC + VC Q Topic 3: Microeconomic behaviour - Average total cost (ATC): Unitary cost or cost per unit of output. Total cost divided by the quantity produced in a given period of time. + ATC Q Topic 3: Microeconomic behaviour - Marginal cost (MgC): Refers to the change in total cost when one more unit of output is produce. MgC Covering marginal cost is a minimal condition for supplying additional output. Q Topic 3: Microeconomic behaviour b) The firm’s production decision. Perfect Competitive Market: - The firm has No market power. - The firm is a Price taker. P S P D D Q Q Topic 3: Microeconomic behaviour Goal: to maximize total profits, the difference between total revenue and total costs. Profits = Total Revenue – Total Costs Profits= (PxQ) – (ATCxQ) Profits = Qx(P-ATC) • P > ATC → Profits > 0 • P = ATC → Profits = 0 • P < ATC → Profits < 0 Topic 3: Microeconomic behaviour In order to maximize profits price must equal marginal cost: P = MgC MgC MgC P ATC P D Q Output Topic 3: Microeconomic behaviour • References: - Schiller, B. R. (2017) Essentials of Economics (10th ed.) New York, NY: McGraw-Hill. - Sloman, J. & Garratt, D. (2010). Essentials of Economics (5th ed.) Essex, UK: Pearson Education