TASTES & PREFERENCES OF CONSUMERS
The consumer
•Individual or household
–Scarcity forces consumers to choose
–Always prefer to have more (not less)
•Consumers are rational
–Satisfy as many needs as possible…
–…with their limited income (budget)
•Preferences
•Are different:
–Different people like different things
–E.g. I like books more than movies
•Are transitive:
–If I like apples more than pears
–And if I like pears more than bananas
–I will like apples more than bananas
•Utility
•Utility of a product
–How much satisfaction I get from using it
•Marginal utility
–Extra satisfaction I get from consuming another product
•Cardinal and ordinal utility
–Measure by ordering = ordinal
Measuring
utility
•Cardinal
–Apple = 100 utils
–Beer = 50 utils
–Movie = 20 utils
•Ordinal
–I like eating apples more than drinking beer
–I like drinking beer more than going to movies
•Get the most utility from their income
–Greatest MU for every additional Rand spent
–If MUmovie = 100 utils and Pmovie = R20
–MU from R1 spent = MU/P = 100/20 = 5
–Compare against other products and income
•Consumer equilibrium given by:
–MUA/PA = MUB/PB = … But what
if utility
cannot be
expressed in
numbers?
•Compare levels of satisfaction (utility).
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DEMAND & SUPPLY
Demand
•Relate QD and price
• “Law of Demand”
•Demand depends on (is a function of):
–Price (move)
–Income (shift)
–Related products (shift)
–Taste and preference (shift)
Other factors
•Increase in the population?
•Expectations e.g. a sale or a large increase in the petrol price?
Supply
•Relate QS and price
•“Law of Supply”
•Supply depends on (is a function of):
–Price (move)
–Cost of inputs (shift)
–Technology (shift)
–Productivity (shift)
Equilibrium
•When opposing forces are in balance
•In the market --- where quantity supplied is exactly equal to quantity demanded
•No excess demand or excess supply
•The market is said to clear
•Negotiating process as an example
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