1. Consumer Behavior

2.  Common Sense ◦ High Price discourages customers from buying ◦ Low Price encourages customers to buy  Consumer Behavior is reflected in the Demand Curve

3.  The change in the price of a product will have effects on…. ◦ Consumer’s real income ◦ The quantity demanded of that product  When the price of a good declines, people will have more money to spend  My son’s allowance: $20 per week ◦ He drinks 8 Monsters a week at $2.50 ◦ If price of monsters were to decrease to $2.00  He would have $4.00 Extra!  He can either purchase more Monsters or other goods

4.  This is the impact that a change in product’s price has on its relative expensiveness and on the quantity demanded ◦ When price of a product falls, that product is now cheaper relative to other products ◦ If Monster falls from $2.50 to $2.00, it becomes a better buy ◦ Lower price induces my son to substitute Monsters for other caffeinated drinks  He will buy More of it

5.  Mankiw’s Priniciple #3: Rational People Think at the Margin ◦ Margin—an incremental adjustment ◦ What is the benefit of the next item consumed? ◦ What is the cost of the next item consumed?  Utility ◦ Want satisfying power  Marginal Utility is the extra satisfaction that a person derives from an additional consumption of one more item

6. Tacos Consumed Per Meal Total Utility Derived “Utils” Marginal Utility “Utils” 00 110 2188 3246 4284 5302 6 0 728-2

8. Soda MachinesNewspaper Box

9.  Consumer behavior and equilibrium is based on: ◦ Budget Lines ◦ Indifference Curves

10.  Technical Constraint  Schedule or curve that shows various combinations of two products a consumer can purchase with specific income

11. Monsters $2.50 per Snickers $1.00 per Total Expenditure 80$20 (=$20+0) 65$20 (=$15+$5) 410$20 (=$10+$10) 215$20 (=$5+$15) 020$20 (=0+$20)

12. Budget Line Monsters Snickers

13.  Two (2) things can cause the budget line to shift ◦ Income Changes  Increase in income will shift the curve to the left ◦ Price Changes  Decreases in the price of both items will shift the curve to the left  Change in price relative to the other will cause change in slope

14.  Subjective  An indifference curve shows all the combinations of two products (A and B) that will yield the same total satisfaction or total utility to a consumer

15. CombinationMonstersSnickers j122 k64 l46 m38

16. Indifference Curve Schedule Snickers Monsters j

17.  Convex to origin  Slope at each point measures Marginal Rate of Substitution ◦ Rate at which consumer will substitute one good for the other in order to remain equally satisfied. ◦ As the amount of Monsters increases, its marginal utility decreases ◦ As the amount of Snickers decreases, its marginal utility increases

19.  Curves farther from origin indicate higher levels of total utility  Curves closer to origin represent less total utility

20.  The best combination is the point where the indifference curve and the budget line are tangent.

22.  Demand is the quantity of a good that a person will buy at various prices.

23.  By varying the price of one of the goods while holding the price of other constant, the points of tangency will change. n This gives alternative price/quantity combinations.

24. Deriving a Demand Curve from the Indifference Curve

25.  Does everyone think this way?  As Mankiw points out: No  Consumer behavior is a model

26. A brief overview

27.  Total Income from sales

28. Revenue P Q S D REVENUE = PRICE X QUANTITY

29.  Fixed Costs ◦ Incurred no matter what the output is  RENT  VEHICLES  EQUIPMENT  Variable Costs ◦ Costs which vary per with output  LABOR  UTILITIES  FUEL CONSUMPTION

30.  TOTAL COST = FIXED + VARIABLE

31.  Very Simple ◦ PROFIT = Revenue – Total Cost

32.  Takes into account Explicit Costs (like an accountant)  Also takes into account Implicit Costs ◦ Opportunity Cost

33. Economic Profit vs Accounting Profit Implicit Costs Economic Profit Explicit Costs Accounting Profit Explicit Costs EconomistAccountant

34.  A firm’s implicit costs are the opportunity costs of using its self-owned, self employed resources.  To the firm, opportunity costs are the money payments that self employed resources could have earned in their best alternative use

35.  You are earning $22,000 per year as a salesperson at the Gap  You decide to open up your own store!  You have saved up $20,000 in CDs that were paying 5% per year ◦ Use that $20K as a down-payment/initial investment on your new store ◦ New store’s lease is $5K per year ◦ You hire clerk to help out and give her $18K annually

36. Total Sales Revenue $120,000 Cost of Tee Shirts $40,000 Clerk Salary$18,000 Utilities$5,000 Total Explicit Costs $63,000 Accounting Profit $57,000 Looks Good…..right????

37. Accounting Profit $57,000 Foregone Interest $1,000 Foregone Lease$5,000 Foregone Wages$22,000 Foregone Entrepreneurial Income* $5,000 Total Implicit Costs $33,000 Economic Profit$24,000

38.  Economic Profit is not a cost, because it is a return in excess of the normal profit that is required to retain the entrepreneur  Even if the Economic Profit is zero, the entrepreneur is still covering all explicit and implicit costs, including a normal profit.  In our example, as long as accounting profit is $33,000 or more, you will continue to operate