BCom Notes Part I Economics Consumer Behavior
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Consumer Behavior
The Cardinal Utility Analysis of Consumer Behavior The Theory of consumer behavior can be explained with basic approaches.
1. The Cardinal Approach
2. The Ordinalist approach
Cardinal believes that utility can be measured. While believes that utility is not measurable.
The Theory of Consumer Behavior
Problem of choice arises when we have limitation to some thing. We try to satisfy the most urgent wants for and less urgent afterward.
We can say that a consumer when faced with limited means and unlimited wants consciously or unconsciously utilities his resources in such a manner that he at the highest level of satisfaction.
This is consumer equilibrium point.
A point from where consumer is not like to change his decision unless the price of the commodities or his income change.
Utility Analysis
Meaning of utilities
The power of a commodity of satisfy a human want is called its utility. For Example Clothes has a utility for us because we can wear it.
Utility analysis based on cardinal measurement of utility. The main assumption are
A. Cardinal measurement of utility
B. Independent utilities
C. Marginal Utility of money remain constant
D. Introspection method
A. Cardinal Measurement of Utility
Utility is measured and quantifiable entity. The utility of goods expressed in cardinal numbers tell us a great deal about the preference of the consumer like (10 Units, 20 Units)
B. Independent Utilities
According to the cardinal school the utility is a function of the quantity of those goods and of that good alone. It does not depend at all upon the quantity consumed of that good.
C. Marginal Utility of Money Remain Constant
The marginal utility of money with the purchase remains constant but as the more of its purchased or consumed the marginal utility of commodity diminishes.
D. Introspection Method
The Cardinalist school assumes that the behavior marginal utility in the mind of another person can be self observation.
Total Utility (TU) And Marginal Utility (MU)
This is the sum total of the units of utility which can derives from consumption of all the units of commodity during a specified period of time.
TU = F(x1, x2, x3, …….xn) Where x1, x2, x3, …..xn) quantities of goods.
MU = Change in TU that results from adding one units change in consumption of commodity per unit of time.
Law of Diminishing Marginal Utility
This law describes a familiar and fundamental tendency of human behavior.
The additional benefit which a person derives from an increase of his stock of a thing diminishes with every increase in the stocks that he already has.
OR
The Marginal utility of a commodity diminishes as the consumer gets larger quantities of it.
This law based upon two facts
1. Total wants of a man are unlimited but each single want can be satisfied. As a man gets more and more of a commodity the desire of his want for that good goes on failing. A point is reached when consumer no longer want any more units of that good.
2. Different goods are not perfect substitutes for each other in the satisfaction of various particular wants. As such marginal utility will decline as the consumer gets additional units of a specific good.
Explanation of the Law
Suppose a man is very thirsty. He goes to market and buy a glass of sweet water. The glass of water gives him immense pleasure or say first glass of water is great utility for him. If he takes second glass utility is than first one. And if he increases the glass of water will reach at the stage where he feel negative increase or say utility is declined.
Simply we say in a given span of time the more use of product the lesser will be the utility.
Assumption of the law
Assumption of law of diminishing utility are:
1. Rational behavior of consumer
2. Constant marginal utility of money
3. Diminishing marginal utility
4. Utility is additive
5. Consumption to be continuous
6. Suitable quantity of a commodity
7. Characteristics of the consumer does not change
8. No change of fashion, customer, tastes
9. No change in the price of commodity
Consumer Surplus Concept
The theory of consumer surplus is also based on the law of diminishing marginal utility. A consumer while purchasing the commodity compares the utility of the commodity with that of the price which he has to pay. In most of the cases he is willing to pay more than what be actually to pay. The excess of the price which he would be willing to pay rather than to go without the thing over that which he actually does pay is the economic measure of this surplus satisfaction.
Qs. How Equilibrium of a firm is determined under monopolistic competition. Explain?
Why in this condition the demand curve facing firms is more elastic than under monopoly?
OR
Distinguish between monopoly and monopolistic competition and explain why the demand curve under monopolistic competition. Discuss the equilibrium a firm under conditions of monopolistic competition.
Monopolistic Competition is a market situation in which there are relatively large number of small firms which produce or sell similar but not identified commodities to the customers. It is different than perfect and monopoly market therefore refer as imperfect market. (e.g. coal market, tooth paste market)
Characteristics of Monopolistic Competition
The main characteristics of monopolistic competition are
1. Large number of seller
2. Differentiable goods
3. Advertisement and propaganda
4. Nature of demand curve
5. Freedom of entry and exit of the firms
If we found these conditions in any market we simply say it is imperfect market or monopolistic market.
Price-Output Determination Under Monopolistic Competition
In perfect competition demand curve is perfectly elastic due to large number of sellers and homogeneous good. While in monopoly the demand curve is downward sloped and which is relative in elastic due to single sellers.
But in Monopolistic competition these is large number of sellers but goods are differentiate. So they can make there sell more by advertising and make them self. Prominent but not able to change much higher price due large number of seller. i.e. Why the demand curve is downward sloped in Monopolistic market and relatively elastic.
Firm’s Equilibrium Price and Output
In short run monopolist firm may get super normal profit or may be in losses.
Equilibrium Price and Output In Long run under Monopolistic Competition
In Monopolistic market all firm shows no profit and no loss in order to avoid the entry of new seller. If they show profit in long run new seller may losses.
Qs. What is Oligopoly? What are the causes of oligopoly? How do price and output determined oligopoly?
Oligopoly
Oligopoly is the market which there are a few or small number of firms an industry and they produce the major share of the market.
Characteristics of Oligopoly are
1. Few or small number of seller (may be 4,3,2)
2. Homogenous good (like cement)
3. Bearer to entry.
Causes of Oligopoly
Due to some causes oligopoly are
1. Economics of Scale
If some firm have potential of improved technology and getting economics of its production than other who use old techniques to suffer in the market and may exit so many firms left due to economics of scale.
2. Barrier to Entry
Some firms have control over the raw material used in production or they get ownership for the raw material so there is a bearer created for new firms.
Merger
If few firms merge with each other.
Mutual Interdependence
Firms watch each other price and mutually decide or set the prices.
Price and Output Determination Under Oligopoly
There is not a single theory which exactly explains the pricing and output divisions under oligopoly.
The reason for that are:
1. Goods Produced may not be standardized
2. Oligopoly firms sometime mutually fire there price but some times at independently.
3. There is some bearer to entry of new firm which is impossible some times.
Qs. Differentiate between Laws of Return and Laws of return to scale.
Laws of Return
When we generally talk about change in input and as result or in return output will also change we deal in Laws of Return. There are few laws of returns
1. Law of variable proportion
2. Law of Constant return
3. law of Increasing return
4. Law of Diminishing return
5. Law of cost
1. Law of Variable Proportion
As we change the variable factor of production and keeping the factors constant than first average and marginal output will increase but after more addition of that factor marginal output will tries to decline and we rich at the stage where marginal output is at maximum while marginal output is equal to zero and further increase in output cost a negative impact (marginal output will negative)
2. Law of Constant Return
When the percentage output is equal to percentage change return to output is called constant marginal return.
3. Law of Increasing Return
When the percentage change in input is less than percentage change in return to output is called increasing marginal return.
4. Law of Diminishing Return
When the percentage change in input is greater than percentage change in return to output is called diminishing marginal return.
5. Law of Cost
If we increase the cost of production output will may increased and if we decrease the cost of production output will may decreased.
Laws of Return to Scale
When we consider only our change of scale (means change all factor of production) and got a return as an output. These are called Return to Scale. There are three laws of return to scale:
1. Constant return to scale
2. Increasing return to scale
3. Decreasing return to scale
1. Constant Return to Scales
When we double our scale of input and as result or in return scale of output will also be exactly double then we said we got a Constant Return to Scale.
For Example: Suppose we increase one labor and on knitting machine from one labor and one knitting it means we double our scale of production while in return output goes to four from two means we got a constant return to scale because
scale of input = scale of output.
2. Increasing Return to Scale
If we double our scale of input and as result or in return output will be more than double that is called increasing return to scale. Due to increase in scale of output from got economics to scale.
Suppose we increase two labor and two knitting machine from two labor and two knitting it means we double our scale of input as in return output goes to 10 from 4 means we got on increasing return to scale because
Scale of Input < Scale of Output
3. Decreasing Return to Scale
When we double our scale of input and as result or in return we got increase in output less than double and that is called decreasing return to scale.
Due to less that double scale of output our cost will increase and that is called dis-economics to scale.
For Example Suppose we increase Z labor and Z knitting machine from 2 labor and 2 knitting. It means we double our scale of input as in return output goes to T from A means we got on decreasing return to scale.
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