Economics: Chapter 4, The Market Economy

What is the Role of the Consumer? 🛍️

The consumer buys goods and services according to individual demand, which, when aggregated, becomes market demand (i.e., the total demand across the entire economy). 📈
Businesses observe consumer purchases and develop products to meet this demand. 🎯
Consumers provide information to producers on various trends and purchasing habits, which can help companies tailor products to the needs of specific markets. 📊
Consumers pay indirect taxes (like VAT) on their spending, which serves as an important source of government revenue. 💰

Positive Effects of Consumer Demand ✨

Revenue and Profit Generation: Consumers pay for the goods and services they demand, allowing producers to obtain revenue and profit, which facilitates growth and expansion. 💲🚀
Employment Generation: Consumer spending helps generate employment, as labor is required to fulfill consumer needs. 👨‍💼👩‍💻
Contribution to National Income: Consumer spending constitutes a significant portion of national income, contributing to economic growth. For example, in 2019, consumer spending exceeded €111 billion. 💰📈

Consumer Sentiment 🤔

Definition: A mathematical measure indicating the health of the economy, derived from consumer opinions. 🧠
Optimistic Sentiment: If consumers feel optimistic about their financial wellbeing, they are likely to spend more on goods and services, increasing overall demand and contributing to economic growth. 😊💸
Pessimistic Sentiment: Conversely, if consumers feel pessimistic, they are likely to spend less and increase savings, leading to slower economic growth. 😟📉

Assumptions Concerning Consumer Behavior 🧐

Limited Income: Consumers have limited income, which may not be sufficient to satisfy all needs and wants, leading them to make choices between competing goods. 👛⚖️
Utility Maximization: Consumers aim to achieve maximum utility from their spending, adhering to the equi-marginal principle of consumer behavior. ✨📊
Law of Diminishing Marginal Utility: As more units are consumed, the additional satisfaction (marginal utility) derived from each additional unit will eventually decline. ⬇️😊
Rational Behavior: Consumers are assumed to make rational decisions based on logical reasoning rather than emotion. Irrational behavior includes impulse purchases and decisions driven by emotions, senses, or marketing influences. 🧠💭

Incentives Influencing Consumer Behavior 💡

The government uses various financial tools to influence consumer decisions: 🛠️
- Grants and subsidies for electric vehicles (EVs). 🚗⚡
- Minimum unit pricing to discourage cheap alcohol consumption. 🚫🍷
- Grants for fossil fuel reduction through the Sustainable Energy Authority of Ireland (SEAI). 🌍🌱
- Help to Buy scheme extended in 2020, offering first-time buyers up to €30,000 towards a property. 🏠💰

Using Taxation to Influence Consumer Behavior 💸

Introduced a plastic bag levy in 2001 (currently set at 22 cents) to reduce plastic usage. ♻️👜
Lowered the VAT rate to 9% for hospitality and tourism sectors to stimulate consumption, as this would lower costs for suppliers, reflected in lower prices for consumers. 🏨✈️
Planned a levy of around 25 cents on disposable coffee cups to encourage the use of reusable ‘keep cups’, addressing the 200 million disposable coffee cups going to landfill annually. ☕🌍
Introduced a carbon tax on specific fuels in 2010 with significant planned increases by 2030 to incentivize environmentally friendly alternatives like cycling and public transport. 🚲🚌

Characteristics of an Economic Good ✅

An economic good is a product or service that:
1. Commands a Price: Must be scarce relative to the demand for it. 🏷️
2. Provides Utility: Must deliver satisfaction or benefit to the consumer. Total utility represents overall satisfaction, while marginal utility is the extra satisfaction derived from consuming an additional unit. 😊
3. Is Transferable: Ownership or benefit can be passed from one person to another, as in the case of textbooks after a course. 🤝📚

Law of Diminishing Marginal Utility 📉

Definition: As more units of a good are consumed, the marginal utility will eventually decrease. ⬇️ pleasure
Calculation of Marginal Utility: \text{Marginal Utility} = \frac{\text{Change in Total Utility}}{\text{Change in Quantity}}
Example (provided tables showing total and marginal utility):
- Quantity: 1, 2, 3, 4, 5, 6,
- Total Utility (in units): 10, 25, 45, 70, 90, 105, 120, 125
- Marginal Utility (in units): 10, 15, 20, 25, 20, 15, 15, 5

Assumptions Underpinning the Law of Diminishing Marginal Utility 🧐📜

Consumption Timing: All units are consumed closely together; time gaps may invalidate the results. ⏰
Stable Income: Changes in income can affect the utility derived from goods; thus income should remain stable for valid observations. 💲🔄
Applicability Exceptions: The law does not apply to medical goods (like antibiotics) or addictive goods (like illegal drugs), as their marginal utility does not diminish with additional units consumed. 💊🚫

Consumer Equilibrium ⚖️

Definition of Equilibrium: A state where there is no tendency to change; achieved when following the equi-marginal principle to maximize utility. 🎯
Equi-Marginal Principle: Consumers should allocate their income such that the ratio of marginal utility to price is the same for all goods. ⚖️💰
Example:
- A consumer purchases 10 cups of coffee at €2 each and 10 units of phone credit at €6 each, yielding:
- \frac{MU{coffee}}{P{coffee}} = \frac{MU{phone}}{P{phone}}
- In this scenario, if $ MU_{coffee} = 5 $:
- \frac{5}{2} = \frac{MU_{phone}}{6}
- $ MU_{phone} = 15 $ utils to maintain equilibrium.

Demand 📈🛒

Definition: The quantity of goods and services a consumer wants to buy at various prices; demand is based on utility. 💰🛍️
Law of Demand: An increase in price leads to a decrease in quantity demanded, and vice versa. This establishes an inverse relationship. 📉⬆️

Types of Demand 📋

Individual Demand: Quantity of a good an individual is prepared to buy at each price. 👤
Market Demand (Aggregate Demand): Total quantity all consumers are willing to buy at various prices. 👥
Demand Schedule: Illustrates different quantities demanded at various prices. 📝

Concepts of Demand 💡

Effective Demand: Requires consumers to be both willing and able to pay the price set by suppliers; demand supported by purchasing power. 💪💰
Derived Demand: Demand for a product that arises from its necessity in producing another good (e.g., manufacturers' demand for steel). 🏭🏗️
Composite Demand: When a good is required for multiple uses (e.g., sugar). 🍚🧂
Joint Demand (Complementary Goods): Demand for a product that intersects with the demand for a related product (e.g., cars and petrol). 🚗⛽

Demand Curve 📉📊

Definition: A graphical representation showing quantities demanded at various prices; typically has a negative slope. 📉
Movement vs. Shift in the Demand Curve:
- Movement: Change caused by price fluctuation of the good itself. ➡️
- Shift: Resulting from changes in any other determinant of demand (e.g., consumer income). ↔️

Demand Function: D{X} = f(P{X}, P_{og}, Y, E, T, U, G)

Where:
1. $P_{X}$ = Price of the good itself (movement) 🏷️
2. $P_{og}$ = Price of other goods (substitutes or complements) ↔️
3. $Y$ = Income of the consumer 💰
4. $E$ = Expectations of the consumer 🤔
5. $T$ = Tastes and preferences 💖
6. $U$ = Unplanned factors 🎲
7. $G$ = Government regulations 🏛️

Complementary Goods and Substitute Goods 🤝🔄

Complementary Goods: Goods used together; an increase in the price of one reduces demand for the other. 🍔🍟
Substitute Goods: Goods that satisfy similar needs; an increase in the price of one leads to an increase in demand for another (e.g., tea brands). ☕🍵

Income Effects 📊💰

Normal Goods: Demand increases as income rises. ⬆️💸
Inferior Goods: Demand decreases as income rises; subjected to a negative income effect (e.g., cheaper grocery options taken during economic downturns). ⬇️🛒

Consumer Expectations and Preferences 🤔💖

Future price expectations can shift current demand, as can changes in individual consumer tastes over time. 🔮
Government Regulations: Can also influence demand through legislation (e.g., smoking bans reducing tobacco consumption). 🏛️🚭

Exceptions to the Law of Demand 🚫📈

Giffen Goods: More demanded as price rises due to income effects in low-income households. ⬆️💰
Luxury Goods: Attractiveness increases with price due to perceived exclusivity (e.g., designer brands). 💎✨
Addictive Goods: Consumers may continue purchasing regardless of price changes due to dependency. 🚬💉

Supply 📦🏭

Definition: The quantity of goods firms are willing to make available at various price points over time. ⏰
Economic Role of Firms:
- Facilitate specialization, create job opportunities, and provide consumer options through varied offerings. 🏭🧑‍💻🎁

Types of Supply 📄

Individual Supply: Quantity supplied by an individual firm at different prices. 👤📦
Market Supply: Total quantity supplied by all firms in the market. 🌐📦
Supply Schedule: Illustrates different quantities at various prices. 📝
Law of Supply: As price increases, quantity supplied increases (and vice versa). 📈⬆️

Supply Function: S{y} = f(P{y}, P{r}, C, U, T{ch}, T_{x}, O, N)

Where:
1. $P_{y}$ = Price of good Y (movement) 🏷️
2. $P_{r}$ = Price of related goods ↔️
3. $C$ = Cost of production 💲
4. $U$ = Unplanned factors 🎲
5. $T_{ch}$ = Technology ⚙️
6. $O$ = Objectives of the firm 🎯
7. $N$ = Number of firms in the industry 🏭

Movement vs. Shift in Supply Curve ➡️↔️

Movement along the supply curve is precipitated by price change of the good itself. ➡️
Shift in the supply curve can incur from non-price determinants (e.g., technology, production costs). ↔️

Equilibrium Price ⚖️💰

Equilibrium price is the point where quantity demanded equals quantity supplied, with no pressures for price change. 🎯
Changes in market factors can result in scenarios of surplus or shortage which will drive price adjustments. 📉📈

Price Mechanism Functions ⚙️

Signaling Function: Price changes convey information about market conditions to consumers and suppliers (e.g., rising oil prices signal increased production costs). 💡🛢️
Transmission of Preferences Function: Consumer preferences are communicated through purchasing decisions, guiding supplier practices (e.g., willingness to pay leads to price adjustments). 🗣️🛒
Rationing Function: Price increases during shortages discourage non-essential purchases, restoring market equilibrium. 🚫🛒

Consumer and Producer Surplus 💰📊

Consumer Surplus: The difference between what consumers pay and what they are willing to pay (e.g., buying a house for €280,000 when willing to pay €300,000 reflects €20,000 surplus). 🏡💸
Producer Surplus: The difference between the lowest price a seller would accept and what they receive (e.g., selling a product for €30 when willing to sell for €20 results in €10 surplus). 💲📦
Total surplus can be calculated using the area of triangle formula: \text{Area} = \frac{\text{Base} \times \text{Height}}{2} 📐

Case Study: Irish Housing Market 🏘️🇮🇪

Rising Property Prices (1990-2007, 2013-2020): Driven by rising incomes, population growth, and investment opportunities; consumer expectation influences demand (e.g., property panic). ⬆️💸📈
Falling Property Prices (2008-2012): Resulted from recession, decreasing demand, and restricted access to credit; accompanied by increased migration out of the area. ⬇️ Recession 📉

Government Response to Housing Market Issues 🏛️🏘️

Incentives: Measures like the Help to Buy scheme aim to encourage property market activity. ✨
Controls: The Central Bank's limitations on borrowing aim to avoid excessive leveraging that contributed to past market collapse. 🏦🚫
Rental Market Dynamics: High demand and low supply lead to rent increases; policies like Rent Pressure Zones aim to manage these dynamics. 🏠📈

Policies to Solve the Housing Crisis 🛠️🏡

Emphasizing increased housing supply, improved rental policies, and financial incentives for developers. 🏠🏗️💰 Technologies such as price comparison websites 💻 and e-commerce platforms 🛒 enhance consumer access to information and ease of purchase, changing traditional market