Subject – the behavior of individual businesses. In the individual markets of goods, services and factors of production.
Development of models and hypotheses
Consumer – consumption – utility, value, scarcity, price, demand
Manufacturer – production – price, supply, opportunity costs, goods and services
Perfect-imperfect competition – market, equilibrium
Market of production factors – market, demand, supply, elasticity, competition. (Reference)
Equilibrium of individual markets – general market equilibrium – supply and demand, competition, limit and curve of production opportunities
Relationships on the farm
Role of the market mechanism:
Law and demand curve
Law and supply curve
Preconditions of the analysis
The consumer is rational
Prices and incomes of the consumer are predetermined and constant
The consumer is willing to spend all his income set aside for the purchase of a product (Reference)
The consumer is informed about the qualities and prices of the goods
Consumer baskets are being formed
The same quality and quantity of units of a given good are consumed
Usefulness of goods and consumer choice
Definition of utility
Evaluation of the obtained consumption of a good
Over a period of time and other things being equal
General (Tu) – general utility that the consumer receives in the consumption of a given volume of goods.
Average (Au) – how much total utility per unit of good we get. Au = Tu / Q
Marginal utility (Mu) – the additional utility that is obtained by adding each additional unit of the good.
Delta Tu / deltaQ increase in total utility / increase in quantity
The marginal utility also expresses the slope of the total utility curve at the corresponding point or interval.
When the total utility function is at maximum, the marginal utility is zero (marginal utility is the first derivative of the total utility function by quantity)
The marginal utility curve goes to the fourth quadrant at its negative values.
Law of diminishing marginal utility – the more goods of the same kind and in equal quantities are consumed, the smaller the usefulness of each subsequent added unit.
The weighted marginal utility is measured by dividing the marginal utility of the corresponding quantity by the price of MU1 / P1
In his consumer behavior, the consumer seeks to obtain maximum total utility from all the goods that he simultaneously consumes during the observed period.
Maximization of the total utility is achieved when all the goods in the basket are equalized weighted marginal utility
MU1 / P1 = MU2 / P2 = MU3 / P3 = MUn = Pn
MU1-n are the marginal utility of the respective quantities of goods included in the consumer basket
P1-n are the prices of goods from 1 to n
Gossen’s law – the consumer is in equilibrium when he so allocates his scarce resources that he manages to equalize the marginal utility received from the last unit of income invested in the purchase of a certain range of goods.
Consumer balance factors:
Prices of goods
Usefulness – search
Marginal utility – individual search
Consumer surplus – indicates the amount of “profit” that the consumer receives when forming the equilibrium purchase (Qe) of a given good. At the formed market price (Pe). It depends on the individual assessments of the consumer for the usefulness of the good, its price and the income directed to its consumption. It can be calculated as the difference between the total utility (TU) for the respective quantity and the cost incurred by the consumer for the purchase (P * Q). The graphical illustration of the consumer surplus is with the area formed between the individual demand curve (above it)
Indifference curves, budget lines and consumer balance
Indifference curves – each indifference curve is a set of points at which a set of consumers derives the same total utility in the simultaneous consumption of 2 goods. Once the consumer has chosen 2 goods, he must consume both, ie. zero value cannot be accepted.
Total utility – to maintain the overall utility the consumer moving along a curve increases the consumption of one commodity as a victim of certain volumes of the other commodity. The type of the indifference curve suggests which of the two benefits the consumer has stronger preferences for. This is the good located along this axis of the coordinate system, to which the curves are relatively more perpendicular.
They do not intersect – because we consider the consumer to be relatively stable in their tastes and preferences.
Distance from the beginning of the coordinate system, they express the degree of satisfaction. The farther away it is from the beginning of the coordinate system, the more useful it depicts
Map of indifference – together the indifference curves form a map of indifference. This is the user menu.
A given period of time
The marginal rate of substitution in the consumption of the two goods shows by how much we substitute in consumption a unit of the sacrificial good, or if one unit of the good increases by one, how many units of the other are sacrificed.
Graphic illustration – the total cost that the consumer makes when he buys 2 goods at the same time. What is characteristic of it is that it is influenced by the prices of both goods and the income of the consumer, who has focused on their consumption.
Constant prices and income
A period of time
Budget line slope (S)
S = Px / Py
It is called the marginal rate of transformation of goods MRT = Px / Py The slope indicates the possibility to replace the consumption of one commodity with another.
Movement of the budget line:
In case of change of the income set aside for the consumption of the respective goods (but without change of prices) the budget line is shifted upwards and to the right above the original, respectively, remaining parallel until decreasing and shifts downwards and to the left.
In case of a change in the price of the commodity according to Ox – when one of the commodities becomes more expensive with a constant income and the price of the long commodity, the new budget line will be formed, moving above the original and moving away from the coordinate system. Rotating below the original and approaching the beginning of the coordinate system.
Equilibrium – the consumer is in balance when he touches the farthest possible indifference curve with his budget line. At this point the slopes of the two lines coincide, which gives grounds to derive the equality MUx / Px = MUy / Py
Income-consumption curve – is formed as a graphical illustration based on all points that are equilibrium for a given consumer in a change in his income and other things being equal.
Individual and market demand curve – is formed reflecting 2 effects they are on income and substitution. They appear as a result of the change in the price of a given commodity whose individual market curve is observed. The effect of substitution is the result of an increase in the price of a commodity, a contraction in the quantity demanded of it, and a substitution with another relatively cheaper commodity. It is always negative.
The individual curve reflects the effect of income and the effect of substitution
Substitution effect – always negative
Income effect – when the price of the goods increases, the real income of the consumer shrinks and this leads to a change in the quantity demanded. If the product is inferior, the effect is positive as the price increases and the quantity received from it increases. In the case of normal and luxury goods, the effect of income is negative – the price rises and the quantity demanded shrinks.
Of the two effects, the substitution is stronger. For certain low-value goods and low levels of income, the effect of income dominates over that of substitution. They are called Giffen’s goods
Market demand curve – is formed by summing the individual curves given the level of the countries are combined quantities.