Lecture_Microeconomics_Chapter6

Lecture_Microeconomics_Chapter6 - PART II FOUNDATIONS OF...

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6 Chapter Household Behavior and Consumer Choice PART II FOUNDATIONS OF MICROECONOMICS: CONSUMERS AND FIRMS
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2 of 40 6 Household Behavior and Consumer Choice PART II FOUNDATIONS OF MICROECONOMICS: CONSUMERS AND FIRMS
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3 of 40 HOUSEHOLD BEHAVIOR AND CONSUMER CHOICE FIGURE 6.1 Firm and Household Decisions
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4 of 40 HOUSEHOLD BEHAVIOR AND CONSUMER CHOICE Assumptions perfect competition An industry structure in which there are many firms, each small relative to the industry and producing virtually identical products, and in which no firm is large enough to have any control over prices. homogeneous products Undifferentiated outputs; products that are identical to, or indistinguishable from, one another. perfect knowledge The assumption that households possess a knowledge of the qualities and prices of everything available in the market and that firms have all available information concerning wage rates, capital costs, and output prices.
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5 of 40 HOUSEHOLD CHOICE IN OUTPUT MARKETS Every household must make three basic decisions: 1. How much of each product, or output, to demand 2. How much labor to supply 3. How much to spend today and how much to save for the future
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6 of 40 HOUSEHOLD CHOICE IN OUTPUT MARKETS THE DETERMINANTS OF HOUSEHOLD DEMAND Several factors influence the quantity of a given good or service demanded by a single household: The price of the product The income available to the household The household’s amount of accumulated wealth The prices of other products available to the household The household’s tastes and preferences The household’s expectations about future income, wealth, and prices
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7 of 40 HOUSEHOLD CHOICE IN OUTPUT MARKETS THE BUDGET CONSTRAINT Information on household income and wealth, together with information on product prices, makes it possible to distinguish those combinations of goods and services that are affordable from those that are not. budget constraint The limits imposed on household choices by income, wealth, and product prices.
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8 of 40 HOUSEHOLD CHOICE IN OUTPUT MARKETS choice set or opportunity set The set of options that is defined and limited by a budget constraint. TABLE 6.1 Possible Budget Choices of a Person Earning $1,000 Per Month After Taxes OPTION MONTHLY RENT FOOD OTHER EXPENSES TOTAL AVAILABLE? A $ 400 $250 $350 $1,000 Yes B 600 200 200 1,000 Yes C 700 150 150 1,000 Yes D 1,000 100 100 1,200 No
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9 of 40 HOUSEHOLD CHOICE IN OUTPUT MARKETS Preferences, Tastes, Trade-Offs, and Opportunity Cost Preferences play a key role in determining demand. Some people like the blues or jazz, some like classical, while others love country music. As long as a household faces a limited budget—and all households ultimately do—the real cost of
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This note was uploaded on 03/30/2008 for the course ECON 2005 taught by Professor Zirkle during the Spring '07 term at Virginia Tech.

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Lecture_Microeconomics_Chapter6 - PART II FOUNDATIONS OF...

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