Production and consumption

SECTION 4
Markets and individual maximizing behaviour

This unit will examine the ways in which markets increase overall welfare through the concepts of consumer and producer surplus. We will discuss the concepts of marginal costs and benefits and take a look at how they affect a firm's decision on whether or not to make one more or one less product.

We have already learned that, at its most fundamental level, microeconomics is the study of how we make decisions. To expand on this point, we need to distinguish between the either/ordecision and the how much decision. You will find this concept useful when looking more closely at why firms produce certain levels of output, taking into consideration opportunity cost and sunk (fixed) cost.

This unit concludes with the causes and ramifications of income inequality. While there is much debate about how to address long term inequality, economists can objectively measure the problem's scope and offer options to manage this economic phenomenon. Protracted poverty and inequality can cause long term harm to an economy's development.

Objectives

Upon successful completion of this unit, you will be able to:

• identify the maximizing behavior of individuals in the market;
• identify the behavior of individuals when markets fail;
• apply the concept of marginal analysis in order to make optimal choices, and identify whether the choices are efficient or equitable; and
• analyze the causes and reasons for income inequality.

4.1 Maximizing in the market place

4.2 When markets fail

4.3 Income inequality

SECTION 5
The consumer

This unit will focus on the individual consumer and the characteristics that compel a consumer (to choose) to spend income on goods and services. The consumer experiences utility - a measure of satisfaction - with every purchase that he or she makes, and economists measure that utility in order to find a consumer's optimal rate of consumption. The Theory of Demand is derived from the Theory of Consumer Behavior presented in this unit. An individual's demand function can be explained by two approaches that help illustrate personal preferences: utility analysis and indifference analysis. You will explore these concepts more fully in this unit.

Objectives

Upon successful completion of this unit, you will be able to:

• identify and describe the basic tenets of consumer theory through two alternate approaches: the utility analysis and the indifference analysis; and
• correlate the derivation of the theory of demand to the theory of consumer behavior.

5.1 The rational consumer

5.2 Consumer preferences and consumer choice

5.3 Review

SECTION 6
The producer

In this unit, you will learn about one of the most important economic agents: the producer. The producer (firm) is responsible for creating the production function (output) and is subject to various cost measures as well as the results of diminishing returns. You will explore these ideas more fully as you delve into the relationship between quantity of input and quantity of output. This unit will discuss how and why a firm's costs may differ in the short run versus the long run.

Objectives

Upon successful completion of this unit, you will be able to:

• analyze the behavior of the producer;
• compare the costs of production in the short run to costs of production in the long run;
• identify the production function in the short run as well as the long run; and
• compute the relationship between different cost functions.

6.1 The short run

6.2 The long run

6.3 Review