Principles of economics openstax chapter6

College Principles ofPhysics Economics Chapter # ChapterChoices Title Chapter Consumer PowerPoint Image Slideshow Investment in Human capital Higher education is a good investment regardless of state of the economy INVESTMENT IN HUMAN CAPITAL Those with the highest degrees in 2012 had substantially lower unemployment rates whereas those with the least formal education suffered from the highest unemployment rates The national median average weekly income was $815, and the nation unemployment average in 2012 was 6.8% Theory of consumer behavior The consumer tries to gain the largest possible benefit from goods and services purchased given a budget constraint Maximize Utility subject to Budget Constraint Theory of consumer behavior Budget Constraint: A limit imposed on household choices by income, wealth, and product prices José has income of $56 Movie pickets cost $7 each and T-shirts cost $14 each He can buy movie tickets only, T-shirts only, or any combinations of both that are affordable like tickets and shirts Theory of consumer behavior Theory of consumer behavior Equation of the budget constraint can be written PxX + PyY = I Px = price of X X = quantity of X Py = price of Y Y = quantity of Y I = consumer income THEORY OF CONSUMER BEHAVIOR The budget constraint will rotate out when price of X falls THEORY OF CONSUMER BEHAVIOR The budget constraint will shift out in a parallel manner when consumer income increases THEORY OF CONSUMER BEHAVIOR Total Utility (TU) is the benefit or satisfaction you receive from consuming a good or service Marginal Utility (MU) is the additional satisfaction gained from consumption an extra unit of a good or service Law of Diminishing Marginal Utility: The more of any one good consumed, the less satisfaction is received MUX declines as you consume more and more X THEORY OF CONSUMER BEHAVIOR Diminishing Marginal Utility Total Utility and Marginal Utility Trips Total Marginal to Club Utility Utility 12 12 22 10 28 32 34 34 THEORY OF CONSUMER BEHAVIOR The Utility-Maximizing Rule: In general, utility-maximizing consumers spread out their expenditures until MU per dollar spent on one good is equal to MU per dollar spent on any other good MU X MUY = PX PY MUx: marginal utility of X MUy: marginal utility of Y Px: price of X Py: price of Y THEORY OF CONSUMER BEHAVIOR THEORY OF CONSUMER BEHAVIOR As the price increases from P0 to P1 to P2 to P3, the budget constraint on the upper part of the diagram shifts to the left The utility-maximizing choice changes from M0 to M1 to M2 to M3 As a result, the quantity demanded of housing shifts from Q0 to Q1 to Q2 to Q3, ceteris paribus The Law of Demand: price and quantity demanded are negatively related Demand is downward sloping THEORY OF CONSUMER BEHAVIOR Diminishing Marginal Utility and Downward-Sloping Demand At price of $40, the utility gained from even first Thai meal is not worth the price At price of $25, Ann and Tom eat Thai meals times a month At price of $15, Ann and Tom will eat Thai meals 10 times a month At 25 meals a month, they cannot tolerate the thought of another Thai meal even if it is free E C O N O M I C S I N PRAC TI C E Substitution and Market Baskets If we go back to the utility-maximizing rule that you learned in this chapter, we see Mr Smith comparing the marginal utility of each product he consumes relative to its price in deciding what bundle to buy When we restrict Mr Smith’s ability to substitute goods, we give him a more expensive bundle THE SUPPLY OF LABOR Households supply labor and business firms demand labor The household decision to supply labor depends on: • • • Availability of jobs Market wage rates Skills they possess THE SUPPLY OF LABOR Households use the wage rates to decide how much labor to supply and how much leisure to have Substitution Effect: An increase in wage rate will induce households to supply more labor hours to make extra income As wage rate increases, the quantity supplied of labor will rise Income Effect: An increase in wage rate will induce households to supply fewer labor hours in order to have more hours of leisure As wage rate increases, the quantity supplied of labor will fall THE SUPPLY OF LABOR The supply of labor in “backward bending” with substitution effect > income effect at modest wage rates, but income effect > substitution effect at high wage rates THE SUPPLY OF CAPITAL Households savings supply loanable funds Business firms demand loanable funds The supply and demand for loanable finds determines the rate of interest The supply of capital Personal savings were about to 11% of personal income for most of the years from the late 1950s to early 1990s Since then, the rate of personal savings has fallen substantially, although it seems to have bounced back a bit since 2008  ... Theory of consumer behavior Equation of the budget constraint can be written PxX + PyY = I Px = price of X X = quantity of X Py = price of Y Y = quantity of Y I = consumer income THEORY OF CONSUMER... other good MU X MUY = PX PY MUx: marginal utility of X MUy: marginal utility of Y Px: price of X Py: price of Y THEORY OF CONSUMER BEHAVIOR THEORY OF CONSUMER BEHAVIOR As the price increases from... extra unit of a good or service Law of Diminishing Marginal Utility: The more of any one good consumed, the less satisfaction is received MUX declines as you consume more and more X THEORY OF CONSUMER