Some Fundamentals of Consumer Choice
28 Nov 2011 Leave a Comment
in Economics, Laws of Economics, Principles of Economics Tags: consumer choice, consumption, demand, demand curve, economics, income, income effect, laws of economics, opportunity cost, principles of economics, supply, the law of diminishing marginal utility, time cost, utility
Here are some fundamentals of consumer choice:
- Limited income necessitates choice.
- Consumers make choices purposefully.
- One good can be substituted for another.
- Consumers make choices without perfect information, but knowledge & past experiences do help.
The Law of Diminishing Marginal Utility: As the rate of the consumption of a consumer good increases, the marginal utility derived from consuming additional units of a good will decline or decrease.
A consumer’s willingness to pay for a good is directly related to the amount of utility that he/she will gain from the consumption of a unit of that good.
The Law of Diminishing Marginal Utility implies that a consumer’s marginal benefit (and thus height of their demand curve) will fall with the rate of consumption.
The Law of Demand states that there is an inverse relationship between the quantity of a product purchased and its price.
The “income effect” happens when the price of a product falls, freeing up more “real” income for the consumer, thus prompting them to buy more quantities of the product with their newly realized gain in income.
Time cost is also a factor that consumers consider when buying a product. Consumers also value their time, so the price alone of an item cannot be the ultimate determinant of its value to the consumer.
Applications & Extensions of Supply and Demand
10 Nov 2011 Leave a Comment
in Economics, Principles of Economics, Supply and Demand Tags: business, demand, demand curve, economics, household, households, income, labor, labor market, price, pricing models, resource, resource market, resources, supply curve
The markets for resources and products are closely linked.
Households supply resources (such as labor) to businesses earn income, and businesses supply products (goods and services) to households. It’s a yin and yang thang, baby.
The labor market is a vital resource market.
If there’s an increase in the demand for a product, then the natural effect will be an increase in the demand for the resources that are used to create the product.
An increase in the price of a resource will increase the cost of producing products that use it. This shifts the supply curve to the left.
A reduction in resource prices shifts the supply curve to the right.
The Law of Demand, Consumer Choice, the Market Process, Etc.
07 Nov 2011 Leave a Comment
in Economics, Principles of Economics, Supply and Demand Tags: consumer choice, consumer surplus, demand, demand curve, economics, economizing behavior, market process, quantity, quantity demanded, supply and demand, the law of demand, the law of supply and demand
There is an inverse relationship between price and the quantity of a good that people are willing to purchase. As a natural function of markets, most people are willing to buy less of a good as its price increases, and they’re willing to buy more of a good as the price decreases.
As a side note, this is one of the things that amazes me about stock trading, and penny stocks in particular—it’s one of the few places where people will buy more of a stock when the price is high (because it’s “popular” then) and less of a stock when the price is low (because it’s “out of favor” then)—completely opposite of how they shop at the grocery store.
Substitutes are products that serve similar purposes.
Demand curves have a negative slope b/c the quantity of goods purchased will be less when the price as high as they will when the price is low.
Consumer surplus is the difference between what a good could possibly fetch in the open market versus what someone actually paid for it. Example: If you bought a sweater on eBay that regularly fetches a $50 price, but you got it for $35, then you have a consumer surplus of $15.
Important distinction: A change in demand is a shift in the entire demand curve. A change in quantity demanded is a movement along the same demand curve.
Private Property Rights and Private Ownership
06 Nov 2011 Leave a Comment
in Economics, Principles of Economics, Property Rights Tags: conservation, exchange, incentives, mortgage, ownership, private property, private property rights, property damage, property rights, sell, transfer, value
Private property rights involve three things:
- The right to exclusive use of the property (that is, the owner has sole possession, control, and use of the property, including the right to exclude others);
- Legal protection against invasion from other individuals who would seek to use or abuse the property without the owner’s permission; and
- The right to transfer, sell, exchange, or mortgage the property.
Four Important Incentives of Private Ownership
- Private owners can gain by employing their resources in ways that are beneficial to others, and they bear the opportunity cost of ignoring the wishes of others.
- Private owners have a strong incentive to care for and properly maintain what they own.
- Private owners have an incentive to conserve for the future – particularly if the property is expected to increase in value.
- Private owners have an incentive to lower the chance that their property will cause damage to the property of others.
Trade and Transaction Costs
04 Nov 2011 Leave a Comment
in Books on Economics, Economics, Principles of Economics Tags: economics, exchange, Knowledge and Decisions, middleman, resources, Thomas Sowell, time, trade, transaction, transactions costs, value
Value can be created through exchanges that move goods to people who value them more. Trade is a way to facilitate this type of exchange. Trade creates value.
There’s no way that anyone would willingly enter into a trade if he/she didn’t see some potential for a derived benefit from the transaction.
If one country sucks at growing corn but can grow rice all day long, then by entering into trade with another country that grows rice like it’s going out of style but can’t grow corn due to their climate, both sides benefit from this type of trade.
Transactions costs are the time, resources, and other efforts needed to search out, negotiate, and consummate an exchange. High transaction costs can be a barrier to the proper facilitation of an exchange.
A middleman can reduce transaction costs.
A good reference book is Thomas Sowell’s Knowledge and Decisions.
Notes on Opportunity Cost, Etc.
04 Nov 2011 Leave a Comment
in Economics, Principles of Economics Tags: choice, economics, economizing behavior, opportnity cost, opportunity cost, opportunity costs, sacrifice, value
Economics is in actuality the study of human behavior. It’s the study of how choice affects outcomes, and what makes humans choose what they choose in light of the scarce availability of resources in the world.
Economizing behavior is when you adjust your behavior to position yourself for the most benefit at the least possible cost.
Opportunity cost is the highest valued activity sacrificed in making a choice.
The more costly a choice becomes, the less likely an individual will choose it.
Opportunity costs are subjective, and they vary from person to person. What one person considers a “sacrifice” may not be so for another person.
For example the opportunity cost of going to college, in monetary terms, would be the cost of tuition and textbooks. The non-monetary cost would be the foregone earnings of not being in the work force for those years of schooling.
The Eight Guideposts to Economic Thinking
22 Oct 2011 Leave a Comment
in Economics, Macroeconomics, Microeconomics, Principles of Economics Tags: acquisition, adam smith, decision making, economic actions, economic principles, economic theory, economics, incentives, information, resources, scarcity
The Eight Guideposts to Economic Thinking
- The use of scarce resources is costly; trade-offs must always be made.
- Individuals choose purposefully – they try to get the most from their limited resources.
- Incentives matter – choice is influenced in a predictable way by changes in incentives.
- Individuals make decisions at the margin.
- Although information can help us make better choices, its acquisition is costly.
- Beware of the secondary effects: Economic actions often generate indirect as well as direct effects.
- The value of a good or service is subjective.
- The test of a theory is its ability to predict.
Other Notes:
Economics is really the study of human behavior, and particularly human decision making.
There is less of a good freely available from nature than people would like.
