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The Consumer

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by

Miss Cummins

on 28 September 2016

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Transcript of The Consumer

What is a consumer?
A consumer is an individual who makes the decision whether to buy goods or services
Marginal Utility
Image by Tom Mooring
The Consumer
Price
- it must command a price
The good must be scarce in relation to the demand for it - there's not enough of the good to satisfy demands
Utility
The good must provide the consumer with some feeling of satisfaction
Utility
Utility is the amount of benefit or satisfaction derived from the consumption of a good or service
Characteristics of Economic Goods
Assumptions Concerning Consumer Behaviour
Ms. Cummins
It is assumed that consumers have limited incomes
Income won't satisfy all needs/wants
Consumers must choose
It is assumed that consumers seek to get maximum utility from that income
Consumers will spend their income in such a way that they achieve most satisfaction from goods/services
Best value for money
It is assumed that consumers will act rationally
Consumer will act in a manner consistent with their preferences
Two identical items in two different shops - consumer will buy the cheaper item
It is assumed that consumers are subject to the law of diminishing marginal utility
Case study
Mary likes to drink tea. On a cold day after a brisk walk from work, the first cup of tea gives Mary maximum utility.
As she drinks more tea, the extra utility she receives from that extra cup of tea eventually begins to fall.
But the second cup of tea doesn't give as much utility as the first.
The third gives even less.
An economic good is a product or service which commands a price, derives utility and is transferable
Fresh air - not scarce - people won't pay for it - doesn't command a price
Consumers won't demand something that they don't want

Transferable
Ownership/benefit must be capable of being given from one person to another
You could buy a lollipop and give it to someone else
Beauty/good health cannot be sold or transferred
A football = Economic good
A talent for playing soccer = not an economic good
Marginal Utility (MU) is the addition to total utility (TU) brought about by the extra utility received caused by the consumption of one extra unit of a good
Extra satisfaction a consumer gets from consuming an extra unit of the good
The Law of Diminishing Marginal Utility
This states that as more units of a good are consumed, a point will be reached where marginal (extra) utility eventually begins to decline.
Units of Water TU MU
1st glass
2nd glass
3rd glass
4th glass
20
32
40
42
0
12
8
2
First glass gives maximum utility
After the second glass the MU decreases to 12 utils
A util = one unit of satisfaction
Assumptions Underlying the Law of Diminishing Marginal Utility
It applies only after a certain minimum (the origin) has been consumed
What does not comply with the Law of Diminishing Marginal Utility?
Medicine
Addictive Goods
It does not apply to addictive goods/medicines
It assumes that income doesn't change
Sufficient time has not elapsed for circumstances to change
Example 1
Q. At what point does diminishing marginal utility set in?
A. When the fifth good is consumed/after the consumption of the fourth good.
Why?
This is because the MU of the fifth good consumed declined by 5 units (25-20) compared to the fourth good consumed.
Example 2
35
2o
15
10
5
Complete the table. State the point after which diminishing marginal utility sets in.
A. When the third good is consumed/after the consumption of the second good.
Reason?
This is because the MU of the third good consumed declined by 15 units (35-20) compared to the second good consumed.
Consumer Equilibrium
Equilibrium
is the condition where there are no tendency to change
A consumer is in equilibrium when they follow the equi-marginal principle
A consumer must spend their income in such a way that the ratio of MU to price is the same for all the commodities which they buy

MU is achieved when the consumer is obtaining the same utility from the last cent spent on each good.
The Equi-marginal Principle/Law of Equi-marginal Returns
It shows us how consumers allocate their income in such a way that the last cent spent on each good will bring the same marginal utility - consumer equilibrium
This explains the behaviour of a consumer in distributing their limited income along various goods and services.
Formula: MUx/Px = MUx/Py = MUn/Pn
HANDOUT
EXAMPLE
A consumer in equilibrium buys 10 cups of coffee at €2 each and 10 phone cards at €6 each. The MU of the cups of coffee is 5 utils. What is the MU of the phone cards?
MU of coffee
Price of coffee
MU of phone cards
Price of phone cards
5
€2
MUpc
€6
MUpc = 15 utils
Full transcript