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Elasticity and Consumer Behavior

Elasticity and Consumer Behavior

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Published by Mhel Demabogte
elasticity and consumer behavior
elasticity and consumer behavior

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Published by: Mhel Demabogte on Jun 17, 2013
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Elasticity and Consumer Behavior

DETERMINANT OF SUPPLY ELASTICITY The principal determinant of supply elasticity is the time involved in the ability of producer to respond to price changes. Ifit takes a short time to produce the product to take an advantage of an increase in price, then supply is elastic. Factory products are generally elastic. If a factory has sufficient available raw materials, it can increase its output by hiring more workers and let them work overtime.however,if such factory is already under full plant capacity, itcannot longer respond to price change(increase).in the long run, the factory has to set up more buildings and machines, and hire more workers it prices are still favorable. On the other hand, if it takes a long time to produce the product, the supply in inelastic.agricultural or farm products are usually highly inelastic.it takes months or years to produce vegetable, fruits and crops, clearly,this is one of the disadvantages of agriculture or farming producer cannot immediately respond to a price increase. With respect to one formula in measuring the degree of elasticity of supply,the one which is used in demand elasticity is also applicable. just change the “quantity demanded” into “quantity supplied”. THEORY OF CONSUMER BEHAVIOR 1. Law of Diminishing Marginal Utility. Utility means satisfaction.Marginal utility refers to additional satisfaction of a consumer whenever he consumes one more unit of the same good. Consumption of more successive unit of the same good increase total utility, but at a decreasing rate because marginal utility diminishes. Forexample, consumption of 1 cone of ice cream gives satisfaction to the individual. Consumption of another cone of ice cream of the same kind gives an additional satisfaction;again,he consumes the third cone of the ice cream of the same kind. His total satisfaction has increased by consuming 3 cones of ice cream in just one sitting. But his additional satisfaction from the third cone of ice cream is lesser than his additional satisfaction from the second cone of the ice cream. This is a normal experience of consumers.it is not possible us to consumer unlimited cone of ice cream in one hour or one day. Otherwise,if we keep on eating more cones of ice cream,we reach a point where we feel pain instead of satisfaction. Thus, utility or satisfaction has become negative or lower than zero.

and so on. He has no particular choice.Table 3.by definition. INDEFFERENCE CURVE.2. Combination A B C D E Kilo of meat 5 4 3 2 1 Kilo of fish 1 2 3 4 5 . Theword “indifference” means showing no bias or neutral. Quantity of consumed 1 2 3 4 5 6 a good Total utility 5 9 12 14 15 15 Marginal utility 4 3 2 1 0 2. This means any combination would be desirable for him. an indifference curve is a curve which shows diffent combination of two goods which yield the same level of satisfaction. Since all the combination he receives. Supposing there are five combinations of two products (like meat and fish): the first combination constitutes 5 kilos of fish and 1 kilo of meat.An indifference schedule showing the various combinations of meat and fish. Table 3.1. Total utility increase at a decreasing rate due to a diminishing marginal utility.

MEAT 5 4 3 2 1 FISH 0 1 2 3 4 5 .3.An difference map is composed of a series of indifference curve. Each curve to the right of another curve provides greater satisfaction because it constitutes combinations of more units (or kilos) of two products (meat and fish). Each curve indicates a different level of total utility. MEAT 5 A 4 B 3 C D 2 1 E 0 1 2 3 4 5 FISH Figure 3.A consumer’s indifference curve: every point on an indifference curve indicates a combination of two products which provides the same level of satisfactions.FIGURE 3.4.

given the prices of the products. a consumer has a fixed budget.3 Table 3. As an example. unit price of both product A and B P25 . he can also choose 4 units of b and units of A.BUDGET LINE A budget or consumption-possibility line indicates the various combinations of two products which can be purchased by the consumer with his income. and he has to spend his money wisely to be able to maximize his satisfaction.however. He has several combinations of two products to choose.3. any of these combination is worth P150 Please see table 3.the budget of the consumer is P150. or 5 unit of B and 1 unit of A.it is possible for him to buy 5 units of A and 1 unit of B. Unit of product A 5 4 3 2 1 Unit of product B 1 2 3 4 5 Total expenditures P125+P25=P150 P100+P50= P75+P7= P50+ P100 = P25 + P125 = P150 P150 P150 P150 . his choice is contined within the limits of his budget.A budget line schedule showing the various combinations of two products with a fixed budget of P150 and the unit price of both products at P25.

The point where the budget line is tangent to .6 shows an indifference map with a budget line which is tangent in indifference curve 2 the indifference map shows the preferences of the consumer.5. Ofcourse. any combination on the indifference curve 1 is preferred to any combination on the indifference curve 2:and any combination on indifference curve 2 is preferred to any combination on indifference curve 3. which combination would he prefer? Any consumer tries to maximize utility. However. butthis has lower utility. Of course his choice is one that is attainable. Although D has more utility. he consumer cannot acquire said combination because it is beyond his budget. So his Equilibrium behaviour is to choose the combination which maximizes his satisfaction. indifference curve 2 has more utility than indifference curve 3. The budget line shows what he can choose any combination such as A B or C on the budget line.this means more utility sosatisfaction. not all combinations of the three indifference curves are available to the consumer because of limits budget. For example.the reason is that indifference curve 1 has combination with more units of the two product that indifference curve 2. In like manner.A graphical illustration of budget line 5 A 4 B 3 C D 2 1 E The Equilibrium of the Consumer A consumer has a several combinations of two products to choose from. he can purchase any combination below the budget line. Figure 3. This means he can afford to purchase the product with his fixed income or budget.Figure 3.

the consumer cannot buy combination D. Therefore. Such combination of two products is B. they buy them even if there is big increase in their prices. and these have not substitutes. if goods and services are not important and there are substitutes. but it has lower utility. because it is above the budget line. On the other hand. such as in the field of pricing strategites and taxation.an indifference curve indicates the combination which maximizes the consumer’s satisfaction. Figure 3. This is also the point where the budget line is tangent to the indifference curve. Good X Good Y SUMMARY 1.although this has more utility. these are te addicts. respectively. a good knowledge of demand elasticity serves as a good guide for business managers and government policy makers. . Another assumption for additional satisfaction to fall is that such products have the same quality. The concept of demand elasticity has practical application in business and economics policies. Equilibrium of the consumer showing B as the combination of two goods which provides maximum satisfaction to the consumer. When goods and services are needed by consumers. there are individuals who appear not to be affected by the law of diminishing marginal utility. buyers tend abandon them whenever their prices go up. 2.6. 3. Additionalsatisfaction decrease as additional units of the same product are consumed in one sitting. Of course. He can acquire any combination below the budgetline.

4. It we have more money. TERMS FOR REVIEW -Demand elasticity -Elasticity -Law of diminishing marginal utility -Indifference curve -Budget line .Equilibrium of the consumer . This means we attain higher level of satisfaction. Our ability to satisfy our human wants depends on your budget or purchasing power. then we can buy more goods and services.

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