True or False, then explain why. Thank you in advance.

TOPIC: Price Elasticity of Supply and Consumer Behavior

1. The marginal rate of substitution diminishes along an indifference curve.

2. Customer would always want to have more of a good.

3. Transitivity in consumer choice means that consumers know how much utility each bundle of goods can give them.

4. Consumer prefer gifts in-kind rather than gift certificates.

5. Indifference curves are bowed towards the origin because people prefer to have a variety of goods than a lot of just one thing.

6. When analyzing consumer behavior, only a seller is expected to know information about the product.

7. Consumption bundles are chosen by the consumer.

8. In consumption theory, both borrowing and saving is considered a normal part of consumer behavior.

9. Individuals must sacrifice more working hours if they want more income.

10. A budget line's slope shows the total price of the bundle of goods.

REFERENCE:

PRICE ELASTICITY OF SUPPLY AND CONSUMER BEHAVIOR Price Elasticity of Supply According to a journal Economics Online, price elasticity of supply [PES) measures the responsiveness of quantity supplied to a change in price. The following equation can be used to calculate PES: Price Elasticity of Supply (Es) = Percentage Change in Quantity Supplied Percentage Change in Price %4Qs (Qs2 - Qs1)/Q51 Es = - (P2 - P1)/P1 Where: Q,2 = Current quantity supplied Q,1= Previous quantity supplied P2 = Current price P1= Previous price Values of Elasticity Price elasticity coefficient Supply elasticity Less than 1 Inelastic Perfectly inelastic Unitary More than 1 Elastic ILLUSTRATION: Consider a producer of organic juice. On the first month of the production, he sold 1,500 bottles at the price of P120. Positive feedback from consumers encouraged him to supply 2,500 bottles the following month at the price of P180. Calculate the price elasticity of supply. Price ( P) Quantity Supplied (Qs) 120 1,50 180 2,500 SOLUTION: %AQ5 (Q32 - Q:1)/Q51 Es = MAP (P2 - P1)/P1(2.500 - 1,500)/1,500 (180 - 120)/120 0.67 = 1.34 0.50 KEYPOINTS: The supply is elastic based on the computed amount of 134%. Indifference Curves Assumptions of Consumer Theory Optimization - First, we assume that all individuals make consumption decisions with the goal of maximizing their total satisfaction from consuming various goods and services. In consumer theory, we will not allow consumers to either spend less than their income (no saving is allowed) or to spend more than their incomes (no borrowing is allowed). Information - The basic model of consumer theory seeks to explain how consumers make their purchasing decisions when they are completely informed about all things that matter. Specifically, the consumer is expected to know all the products and services available, as well as the corresponding utilities each product brings. It is also assumed that consumers know the prices of the goods and their income during the time period in question. Bundling - Consumer theory requires that consumers can rank (or to order) various combinations of goods and services according to the level of satisfaction associated with each combination. These combinations of goods are called consumption bundles. Two (2) important assumptions must be made about how consumers rank goods: o Complete - For any given pair or consumption bundles, consumers must be able to rank the bundles according to the level of satisfaction they would enjoy from consuming the bundles. A consumption bundle would be ranked higher than another bundle if it offers more utility. If two (2) bundles give a consumer the exact same amount of utility, they would have the same ranking, and the consumer is said to be indifferent to them. When a consumer can rank all conceivable bundles of commodities, the consumer's preferences are said to be complete. o Transitive - This assumption means that the consumer's choices are consistent in the following way: If Bundle A is preferred to Bundle B, and Bundle B is preferable to Bundle C, then it follows that Bundle A is preferred over Bundle C. Consumer preferences must be transitive, otherwise inconsistent preferences would undermine the ability of consumer theory to explain or predict the bundles consumers will choose. It also prevents consumers from being caught in a perpetual cycle where they never make a choice. Non-satiation - This concept assumes that consumers would always prefer to have more of the good, rather than less. It also implies that if Bundle A has more goods than Bundle 5, Bundle A would be preferred. Indifference Curve - This is a set of points representing different combinations of goods and services, each of which providing an individual with the same level of utility.Characteristics of an Indifference Curve. Indifference curves are downward sloping - The consumer obtains utility from both goods. When more of one good (Good X) is added, some of the other good (Good Y) is taken away to maintain the same level of utility- Indifference curves are convex - A convex shape means that as consumption of Good X is increased relative to consumption of Y, the consumer is willing to accept a small reduction in Y for an equal increase in X in order to stay at the same level of utility. Indifference curves are also bowed towards the origin, because consumers prefer a bit of everything rather than a lot of just one thing- Other Concepts in Consumer Theory Marginal utility - This is the additional utility that comes from consuming one more unit of a good, holding constant the amounts of all other goods consumed. Economists typically assume that as the consumption of a good increases, the marginal utility from an additional unit of a good diminishes. For points on a given indifference curve, all combinations of good yield the same amount of utility, so AU is 0 for all changes in X and Y that would keep the consumer on the same indifference curve. Keep in mind that total utility and marginal utility cannot be plotted on the same graph. Utility is measured in U, while is often called utils, while marginal utility is measured in _, where y represents the product. Marginal rate of substitution - This is a measure of the number of units of Y that must be given up per unit of X added to maintain a constant level of utility. Expressed mathematically, the marginal rate of substitution is - -- If the marginal rate of substitution is 2, it means that the consumer is willing to give up two (2) units of Y for each unit of X added. The marginal rate of substitution diminishes along an indifference curve. Budget Constraints The budget constraint restricts consumer behavior by forcing the consumer to select a bundle of goods that is affordable. It defines the set of consumption bundles that a consumer can purchase with a limited amount of income. The Budget Line This is the line showing all bundles of goods that can be purchased at given prices if the entire income is spent. The slope of the budget line, =-, indicates the amount of Y that must be given up if one more unit of X is purchased. For every additional unit of X purchased, the consumer must spend P50 more on good X. To continue meeting the budget constraint, P5 less must be spent on good Y. The relationship between income (M) and the amount of goods X and Y that can be purchased can be expressed as: M =RX + BY Where: A represents the price of the good X, and By represents the price of good Y.If the consumer chooses to spend all his/her income on good X, the equation will become: X = M/Px If the consumer chooses to spend all his/her income on good Y, the equation will be: Y = M/P Utility Maximization When analyzing consumer choice, we want to find the bundle of goods that: Maximize satisfaction Allows the consumer to live within the budget constraint The maximizing bundle must satisfy two (2) conditions: It must be on the budget constraint; and # It must give the consumer the most preferred combination. Two (2) applications of the indifference curves: Gifts and gift certificates - People usually prefer gift certificates as presents rather than gifts of one type of good. Income and leisure: workers Corner solutions Relerences Baye, M., & Prince, J. (2013). Managerial economics and strategy, Be. New York : McGraw Hill. Bentzen, E., & Hirschey, M. (2016). Monogerial economics. Hampshire: Cengage Learning. Cross Elasticity Demand. (n.d.). Retrieved from Investopedia : http://www.investopedia.com/terms/c/cross-elasticity-demand.asp. Economics Online. (n.d.). Price elasticity of supply. Retrieved on August 7, 2019, from https://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_supply.html. Graham, R. (2013). Managerial economics for dummies. New Jersey: John Wiley & Sons. Thomas, C., & Maurice, 5. (2015). Managerial economics: Foundations of business onolysis and strotegy. New York: McGraw Hill Education