In this session, you learnt in detail about the consumer behaviour and producer behaviour by first

understanding the fundamental decisions made by these two economic actors.

This session explained that before making a purchase decision, consumers consider the following two main
factors:
1. Budget
2. Preferences

Next, you were introduced to two economic models, which are given below:

Budget Line

In economics, a budget constraint or budget line reflects all the combinations of goods and services that a
customer can buy within his or her budget given the prevailing prices.

Indifference Curve

An indifference curve is a model that represents the consumer’s preferences. The points on a single
indifference curve gives the consumer the same utility.

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The indifference curves have various shapes, each of which has its own significance:
1. L-shaped Indifference Curve: When the goods are perfect complements.
2. Convex Indifference Curve: Most common and applicable to a majority of real-life cases.
3. Straight Line Indifference Curve: When the goods are perfect substitutes.

Following are the characteristics of indifference curves.

Putting together a consumer’s budget constraint and indifference curve, a consumer's purchase preferences
are at a point where the budget constraint is tangential to the indifference curve.

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Indifference curves and budget lines together help decide what or how much to buy or sell for maximum
utility within the imposed budget constraints.

A change in the price of a product leads to a dual impact on equilibrium in the quantity of two goods purchased
by a consumer.

Price effect is a combination of substitution effect and income effect.

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In this example, both effects are represented.

Substitution Effect: As the price of soccer matches decrease, he will spend more on travel and less on rent.
Thus, there is a change in the budget line, shifting more towards soccer matches.

Income Effect: As consumer income increases, they will spend more on both basketball and football matches.
Thus, the indifference curve shifts towards right.

All the business pricing calculations depend, at their most basic level, on consumer choices and financial
constraints.

In business analysis, the production possibility curve is a curve that explains the variations in the quantities
that can be produced for two goods when the production of both rely on the same finite resource.

The production possibilities curve can be interpreted by understanding the points mentioned below.

The Law of Diminishing Marginal Utility states that all else equal, as consumption increases, the marginal
utility derived from each additional unit declines.

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 The costs that a producer incurs are as follows:

1. Fixed costs: These costs remain constant irrespective of the output produced. These need to be paid
at every level of output, even in the case of zero production.
2. Variable costs: These costs have a direct relationship with the output of the firm. These include the
cost of raw materials, wages paid per unit produced, and so on.
3. Sunk costs: These are costs which have already been incurred and cannot be recovered or changed
during the course of the business.
4. Opportunity cost: The value of the next best alternative that you give up to choose one option.

The average cost structure is as represented in the images below:

The fixed cost is not affected by the quantity produced, so the average fixed cost decreases with the increase
in quantity. The variable cost is directly proportional to the quantity produced; therefore, the average variable
cost increases with the increase in quantity. Thus, the average total cost first decreases and then increases as
shown in the figure.
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External economies of scale are associated with a cost advantage to a company owing to external factors,
whereas internal economies of scale are specific to a firm.

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When plotting the average total cost curve, as the average total cost decreases, a firm experiences economies
of scale, while once the average total cost starts to increase, a firm experiences diseconomies of scale. This
could happen due to communication breakdown or managerial issues.

For digital goods, you learnt that the traditional models of economics can be applied by replacing the quantity
variable with other variables such as time, research units produced and so on.

In the Twitter and Instagram examples, you saw that traditional economics for consumer analysis can be still
applied by thinking from the perspective of the factor that affects the revenue.

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