Elasticity And Consumer Behavior o1f4u

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.

Table 3.1. Total utility increase at a decreasing rate due to a diminishing marginal utility. 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. INDEFFERENCE CURVE. Theword “indifference” means showing no bias or neutral. 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, and so on. Since all the combination he receives. This means any combination would be desirable for him. He has no particular choice.by definition; an indifference curve is a curve which shows diffent combination of two goods which yield the same level of satisfaction. Table 3.2.An indifference schedule showing the various combinations of meat and fish. Combination

Kilo of meat

Kilo of fish

A B C D E

5 4 3 2 1

1 2 3 4 5

FIGURE 3.3.A consumer’s indifference curve: every point on an indifference curve indicates a combination of two products which provides the same level of satisfactions.

MEAT

5

A

4

B

3

C D

2 1

E

0 1

2

3

4

5

FISH

Figure 3.4.An difference map is composed of a series of indifference curve. Each curve indicates a different level of total utility. 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). MEAT 5

4

3

2

1 FISH 0 1

2

3

4

5

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, given the prices of the products. a consumer has a fixed budget, and he has to spend his money wisely to be able to maximize his satisfaction. He has several combinations of two products to choose.however; his choice is contined within the limits of his budget. As an example, unit price of both product A and B P25 .the budget of the consumer is P150.it is possible for him to buy 5 units of A and 1 unit of B, or 5 unit of B and 1 unit of A. he can also choose 4 units of b and units of A. any of these combination is worth P150

Please see table 3.3

Table 3.3.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. Unit of product A

Unit of product B

Total expenditures

5 4 3 2 1

1 2 3 4 5

P125+P25=P150 P100+P50= P75+P7= P50+ P100 = P25 + P125 =

P150 P150 P150 P150

Figure 3.5.A graphical illustration of budget line

5

4

A

B

3

C D

2 1

E

The Equilibrium of the Consumer A consumer has a several combinations of two products to choose from. which combination would he prefer? Any consumer tries to maximize utility. So his Equilibrium behaviour is to choose the combination which maximizes his satisfaction. Of course his choice is one that is attainable. This means he can afford to purchase the product with his fixed income or budget. Figure 3.6 shows an indifference map with a budget line which is tangent in indifference curve 2 the indifference map shows the preferences of the consumer. For example, 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.the reason is that indifference curve 1 has combination with more units of the two product that indifference curve 2.this means more utility sosatisfaction. In like manner, indifference curve 2 has more utility than indifference curve 3. However, not all combinations of the three indifference curves are available to the consumer because of limits budget. The budget line shows what he can choose any combination such as A B or C on the budget line. Ofcourse, he can purchase any combination below the budget line, butthis has lower utility. Although D has more utility, he consumer cannot acquire said combination because it is beyond his budget. The point where the budget line is tangent to

an indifference curve indicates the combination which maximizes the consumer’s satisfaction. Such combination of two products is B. Figure 3.6. Equilibrium of the consumer showing B as the combination of two goods which provides maximum satisfaction to the consumer. This is also the point where the budget line is tangent to the indifference curve, the consumer cannot buy combination D,although this has more utility, because it is above the budget line. He can acquire any combination below the budgetline, but it has lower utility.

Good X

Good Y

SUMMARY

1. When goods and services are needed by consumers, and these have not substitutes, they buy them even if there is big increase in their prices. On the other hand, if goods and services are not important and there are substitutes, buyers tend abandon them whenever their prices go up. 2. The concept of demand elasticity has practical application in business and economics policies. Therefore, a good knowledge of demand elasticity serves as a good guide for business managers and government policy makers, such as in the field of pricing strategites and taxation, respectively. 3. Additionalsatisfaction decrease as additional units of the same product are consumed in one sitting. Another assumption for additional satisfaction to fall is that such products have the same quality. Of course, there are individuals who appear not to be affected by the law of diminishing marginal utility, these are te addicts.

4. Our ability to satisfy our human wants depends on your budget or purchasing power. It we have more money, then we can buy more goods and services. This means we attain higher level of satisfaction.

FOR REVIEW -Demand elasticity -Elasticity -Law of diminishing marginal utility -Indifference curve -Budget line - Equilibrium of the consumer