Introduction to Consumer Theory and Cost

Consumer Theory

• Concept Review

  • Rosie consumes laundry detergent and cupcakes.

  • To determine optimal consumption:

    • If marginal utility per dollar for each good is equal, Rosie is consuming optimally.

    • To find marginal utility per dollar spent:

    • extMarginalUtility(MU)a=extMUperdollarspent=racMUaPa​
      

    • Example calculation:

    • Marginal utility of detergent: 80, price: 10

      • $rac{MU<em>d}{P</em>d} = rac{80}{10} = 8$

    • Marginal utility of cupcakes: 8, price: 1

      • $rac{MU<em>c}{P</em>c} = rac{8}{1} = 8$

    • Since both are equal, Rosie is consuming optimally.

Marginal Utility vs. Marginal Utility per Dollar Spent

• you would refer to marginal utility alone to solve a problem that involves a single good and no budget constraint

• you would marginal utility per dollar to solve a problem that involves allocating a limited budget between two or more goods with different prices

Production and Cost

• Introduction

  • Today's class focuses on production; Friday will address cost.

  • Cost curves are dependent on production factors.

• Types of Costs

  • Explicit Costs:

    • Defined as actual dollar expenditures.

    • Example: Cash spent to acquire resources.

  • Implicit Costs:

    • Costs associated with resources without explicit payments.

    • Represents opportunity costs of alternatives foregone.

    • Example: Using owned space without renting leads to implicit costs.

• Total Cost Calculation

  • Total cost = Explicit costs + Implicit costs.

  • Different from accounting costs, which focus only on explicit costs.

  • In economics, the value of resources must be included in total cost calculations.

  • Profit Types:

    • Accounting Profit:

    • ${Accounting Profit}={Revenue}-{Explicit Costs}$

    • Economic Profit:

    • ${Economic Profit}={Revenue}-{Explicit Costs}-{Implicit Costs}$

    • Earning zero economic profit means achieving normal profit.

• Normal Profit: the opportunity cost of investing in a business

  • Represents minimum acceptable profit in the long run; treated as an implicit cost.

  • Firms earning normal profits can break even, feeling satisfied without leaving the industry.

Profit Maximization

• Firm Goals

  • xIncrease revenue or decrease costs.

  • Research into costs will be crucial.

• Profit Example

  • Total Revenue: 15,000;

  • Explicit Costs: 12,000;

  • Implicit Costs: 4,000.

  • Accounting profit: 15,000 - 12,000 = 3,000.

  • Economic loss: 15,000 - (12,000 + 4,000) = -1,000.

Production Analysis

• Production Categories

  • Total Production, Average Production, Marginal Production.

• Short Run vs. Long Run

  • Short Run:

    • At least one production factor is fixed.

  • Long Run:

    • All production factors are variable.

• Production Efficiency

  • Total output is contingent upon efficiency with given resources.

• Marginal Product Definition

  • Marginal product measures output change with an additional input unit.

  • Example: Adding a worker increases production.

• Productivity Measurement

  • ${Productivity}={}{\frac{TotalProduct}{Input}}$

  • Average productivity of labor: Total product divided by labor amount.

  • Total Product= total amount of output produced with a given amount of resources

• Example Data Table

  • If given output levels for varying workers:

    • No workers: 0;

    • 1 worker: 16;

    • 2 workers: 46;

    • 3 workers: 60;

    • 4 workers: 60.

    • Marginal Product Calculation:

    • 1st Worker: 16 - 0 = 16;

    • 2nd Worker: 46 - 16 = 30;

    • 3rd Worker: 60 - 46 = 14;

    • 4th Worker (no increase): 60 - 60 = 0;

    • 5th Worker: 55 - 60 = -5.

    • Average Product Calculation:

    • For each set of workers:Average output per worker.

Increasing and Diminishing Marginal Returns

• Increasing Marginal Returns:

  • Marginal product increases with additional variable resources.

• Diminishing Marginal Returns:

  • Marginal product decreases as additional variable resources are added.

  • Marginal product visualization:

    • Starts increasing, reaches a peak (marginal product = 0), and then falls into negative returns.

• Average vs. Marginal Product Relationship:

  • The average product rises as long as the marginal product exceeds it.

Conclusion and Further Questions

• Engaged discussions examining key concepts will continue in future classes.

• Encouraged students to prepare questions on the material discussed to ensure deeper understanding.