Week 4 Consumer and Firm Behaviour

Week 4 Consumer and Firm Behaviour - Consumer and Firm...

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Slide: 1 Consumer and Firm Behaviour (TF Chapter 5 (omit pp.93-102) & Chapter 6)
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Slide: 2 Last week… Elasticity… Price Elasticity of Demand Income Elasticity of Demand Cross-price Elasticity Price Elasticity of Supply Calculating elasticity using… Two points formula Derivative formula Arc formula (or midpoint formula)
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Slide: 3 Today’s Agenda Consumer behaviour Utility and marginal utility Willingness to pay and marginal benefit Demand and marginal benefit Consumer surplus Firm behaviour What is a firm? Economic profits and accounting profits Supply and marginal costs Producer surplus
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Slide: 4 MATHS Know how to: Find the area of a triangle!
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Slide: 5 Part one: Consumer behaviour
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Slide: 6 Utility Higher utility means greater enjoyment A basis for comparison “I prefer ice cream to chocolate” “Ice cream gives me more utility than chocolate” Units are arbitrary Cannot compare the utilities of different people.
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Slide: 7 Marginal utility The additional utility gained from consuming one more unit The rate of change or slope of utility • MU X = dTU / dQ X
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Slide: 8 Ice creams Utility Marginal Utility 0 1 2 3 4 5 Catherine’s Utility from Ice Cream Table 5.1 0 0 11 11 20 20 26 26 30 32 32 - 11 9 6 4 2
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Slide: 9 Utility Fig 5.2 0 5 10 15 20 25 30 35 0 1 2 3 4 5 Ice creams per Day Utility Utility Ice- creams 0 1 2 3 4 5 0 11 20 26 30 32
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Slide: 10 Marginal Utility Fig 5.3 0 2 4 6 8 10 12 0 1 2 3 4 5 Ice creams per Day Marginal Utility Marginal Utility Ice- creams 0 1 2 3 4 5 - 11 9 6 4 2
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Slide: 11 Diminishing marginal utility As more of a good is consumed the utility derived from an extra unit starts to fall
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Slide: 12 What if… …marginal utility were increasing? Does such a situation exist?
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Slide: 13 Willingness To Pay and Marginal Benefit Willingness to pay (WTP) The maximum price you would pay for something Your valuation Utility in dollar terms Marginal benefit (or marginal WTP) Willingness to pay for an additional unit Utility in dollar terms for an extra unit
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Slide: 14 Utility vs. Willingness to Pay Utility does not take into account your budget constraint . That is, how much you have to spend. The actual ‘numbers’ do not matter when we talk
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Week 4 Consumer and Firm Behaviour - Consumer and Firm...

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