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Consumer Behavior and Production Behavior

Consumer Behavior and Production Behavior. Chapter - 4. Consumer Behavior Theory. Describes how consumers buy different goods and services also explains how a consumer allocates its income in relation to the purchase of different commodities and how price affects his or her decision. 2.

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Consumer Behavior and Production Behavior

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  1. Consumer Behavior and Production Behavior Chapter - 4

  2. Consumer Behavior Theory Describes how consumers buy different goods and services also explains how a consumer allocates its income in relation to the purchase of different commodities and how price affects his or her decision. 2

  3. There are two theories to explain consumer behavior 1- Utility theory. is defined as the power of a commodity or service to satisfy human want. 2- Indifference preference theory. 3

  4. Total Utility is the total satisfaction obtained from all units of a particular commodity consumed over a period of time". Marginal Utility is the additional satisfaction, or amount of utility, gained from each extra unit of consumption. MU = ∆TU   ∆Q     4

  5. Law of Diminishing Marginal Utility “As a consumer consumes more and more units of a specific commodity, the utility from the successive units goes on diminishing”. 5

  6. The TU reaches at its maximum when MU is zero. • After this point, marginal utility becomes negative. 6

  7. Production Behavior Factors of ProductionThe three factors of production are: • Land (including all natural resources) • Labor (manual, managerial, entrepreneurial) • Capital goods (machines, equipment, buildings) 7

  8. Production Function A production function is a relationship between inputs (factors of production) and outputs (production). 8

  9. Production Function In the table on the next slide, we look at a simple production function. We vary the number of workers, or labor (variable input), and keep the units of machinery constant (fixed input). 9

  10. Production Function 10

  11. Production Function Marginal production : isthe change in total production divided by the change in the number of workers, (the additional production per worker). or: Q / L 11

  12. Production Function 12

  13. Production Function In the table on the previous slide, marginal production decreases after the 3rd worker. Adding a variable input to a fixed input eventually results in decreasing marginal production. This is the law of diminishing marginal production. 13

  14. Production Behavior number of workers increases by more than 1. 14

  15. Production Behavior Average production: is the production per worker, or total production divided by the number of workers. AP = Q / L 15

  16. Production Behavior Question:In the previous table, what is average production when the number of workers is 10? Answer:Total production = 30, so average production = 30 / 10 = 3 16

  17. Short Run versus Long Run The short run is the period of time during which a firm is unable to changeallof its factors of production (it has at least one fixed input).The long run is the period of time during which a firm can change all of its factors of production. 17

  18. Nominal and Real Factor Prices Nominal prices are the actual values charged by the factor supplier. Real prices are adjusted for inflation. For example, if a bank charges 10% interest on a loan, and inflation is 6%, then the real interest rate on the loan is 10% minus 6%, or 4%. 18

  19. Factor Prices In a free market, factor prices are determined by the demand for and the supply of the factor of production. For example, interest rates are determined by the demand for and the supply of loans. 19

  20. Interest Rates In the next diagram, the equilibrium interest rate is 8%. 20

  21. Interest Rates If the demand for loans increases, then the interest rate increases: 21

  22. Interest Rates and Present Value Because of interest, the value of money increases over time. $1,000 today is not the same as $1,000 one year from today. The present value of a future sum of money is:PV = F / (1 + i) n 22

  23. Interest Rates and Present Value Example 1Someone promises to pay you $1,000 one year from today. How much is it worth to you today? Assume that the interest rate is 6%. Answer:PV = F / (1 + i) PV = $1,000 / (1 + .06) = $1,000 / 1.06 = $943.40 n 1 23

  24. Interest Rates and Present Value Example 2Someone promises to pay you $5,000 five years from today. How much is it worth to you today? Assume that the market interest rate is 8%. Answer:PV = F / (1 + i) PV = $5,000 / (1 + .08) = $5,000 / 1.47 = $3401.36 n 5 24

  25. Interest Rates and Present Value Example 3Let’s say that a house appreciated in value by 4% each year over the past 80 years. If the house is worth $500,000 now, what was the value 80 years ago? 25

  26. Interest Rates and Present Value Example 3 answer:PV = FV / (1 + i) PV 80 years ago = FV (now) / (1 + .04) .PV = $500,000 / 23.05 = $21,692. n 80 26

  27. Factor Prices Another factor price is the wage rate. The equilibrium wage is determined by the demand for and the supply of labor. 27

  28. Factor Prices Price of Labor Supply of Labor $7.00 Demand for Labor 1,000 Quantity of Labor 28

  29. Factor Prices Some factor prices are determined by the government, not by demand and supply. For example, in the next slide, the market wage is $7, but a minimum wage of $9 is set by the government. 29

  30. Factor Prices Price of Labor Unemployment Supply of Labor $9.00 $7.00 Demand for Labor 1,000 Quantity of Labor 30

  31. CH 4 - Business Production Behavior • Factor Prices Advantages of a minimum wage set above the free market wage are: • More income for the minimum wage earners that are able to maintain their job. • More incentive for people to work. • Possibly greater job satisfaction and lower job turnover. 31

  32. Disadvantages of a minimum wage set above the market wage: • Decrease in the quantity demanded for labor. • Higher production costs and lower profits. • Higher prices. • Less money for benefits and training. • Decrease in exports due to higher prices. 32

  33. Factor Prices Government-set prices that are different from the market price may have social benefits for some groups, but lead to economic inefficiencies (surpluses, shortages, higher prices, unemployment). 33

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