Kinh tế học - Chapter 6: Delving deeper into microeconomics

Appendix: Chapter 6Delving Deeper Into MicroeconomicsMcGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.Learning ObjectivesExplain the role of utility maximization in consumer choice and use the concept of price elasticity.Explain the role of cost minimization in producer decisions and use the concept of price elasticity of supplyExplain the incidence of a tax.6A-2Consumer ChoiceThe underlying explanation of the demand curve is based on the utility function.The utility function also tells us how much benefit a person gets from purchasing and consuming more of the same thing. Marginal utility is the added utility from consuming one more unit of a good. Diminishing marginal utility is the concept that marginal utility declines as consumption increases. 6A-3The Utility Function of a Coffee DrinkerCups of Coffee in a DayUtility (Measured in Utils)Marginal Utility(Measured in Utils)0014427339241016A-4Budget ConstraintThe utility function is not the only factor that determines what you buy and how much. Budget constraint is the combination of goods and services you are able to buy, given their prices and the amount of money you have available to spend.The budget constraint changes when prices and/or income changes.6A-5Example of Budget Constraint# of meals eaten out in month# of movies seen in monthPrice per mealPrice per movieCost of mealsCost of moviesTotal spending30$20$10$60$0$6022$20$10$40$20$6014$20$10$20$40$6006$20$10$0$60$606A-6Utility MaximizationThe rational individual will select goods and services to maximize utility when subject to a budget constraint.Due to diminishing marginal utility, you are more likely to choose a combination of goods and services rather than one good.As a consumer, you are weighing the marginal utility of spending an extra dollar on one good or service versus another. 6A-7Utility MaximizationConsumers often make decisions that affect their spending decisions in the future.This kind of choice is called intertemporal utility maximization.That is, decisions which involve a trade-off between consumption today and consumption in the future. For example, a decision to cut back spending today to save for a home tomorrow.6A-8Price Elasticity of DemandA utility-maximizing consumer will change his or her purchases when prices change. The price elasticity of demand will determine how much the purchases will change.The price elasticity of demand is the percentage change in quantity demanded that results from a one percent change in price.A price elasticity of 1 means that a 10% increase in price leads to a 10% decrease in quantity demanded. 6A-9Price Elasticity of DemandAn elasticity of 2 means that a 10% increase in price leads to a 20% decrease in quantity demanded. An elasticity of 0.5 means that a 10% increase in prices leads to a 5% decrease in quantity demanded. Demand for a good or service is inelastic if its price elasticity is less than 1, and it is elastic if its price elasticity is greater than 1. 6A-10Price Elasticity of GasolinePrice(Dollars per Gallon)Annual Quantity of Gasoline Demanded (Gallons)Before: $3.00800After: $3.30780Percentage change: (3.30 - 3.00)/ 3.00 =10%Percentage change:(780 - 800) / 800 = -2.5%Elasticity: (-2.5% / 10%) = 0.25 6A-11An Inelastic Demand Curve for Gasoline Demand curve 780$3.00Price per gallon800Annual quantity of gasoline bought (gallons)$3.306A-12An Elastic Demand Curve for Gasoline Demand curve 640$3.00Price per gallon800Annual quantity of gasoline bought (gallons)$3.306A-13Producer DecisionsNow we shift our analysis to the supply or production side of the economy.The cost function gives the cost of producing each level of output.Managers attempt to find the least expensive way of producing a given level of output.This process is called cost minimization.6A-14Choosing the Right InputsThe producer’s choice of inputs depends on their relative prices. As an input becomes more expensive, all other things being equal, a business will want to use less of it. If the cost of labor rises, a business will attempt to use more capital and automate the production process.6A-15Substitutes and ComplementsTwo inputs are substitutes if raising the price of one increases the quantity demanded for the other (holding output constant). For example, factory workers in China are a substitute for factory workers in the U.S. Two inputs are complements if raising the price of one decreases the quantity demanded of the other (holding output constant). Cement and construction workers are an example.6A-16Cost Minimization ExampleLet’s look at the example of a small business. Suppose it must decide whether to buy its own copier or send out to a copy shop such as Kinko’s.If the business buys a copier, it needs to lay out the upfront cost, as well as the costs for toner and paper. To make a decision, it needs to know the actual cost of the machine and the price of a copy.The decision also depends on the scale of output.6A-17Copier Decision6A-18Price Elasticity of SupplyThe price elasticity of supply is the percentage increase in the quantity supplied, given a 1% increase in the price. Supply is elastic if a small change in price leads to a large change in the quantity supplied. Similarly, supply is inelastic if a big change in price leads to only a small change in the quantity supplied. 6A-19Price Elasticity of SupplyAn Elastic SupplyAn Inelastic Supply6A-20Tax IncidenceThe incidence or burden of a tax identifies the persons or businesses who ultimately have to pay a tax. The burden of the tax depends on the elasticity of supply and demand.The following slide shows the effect of taxing a market where demand is inelastic and supply is elastic. 6A-21Taxation with Inelastic Demand and Elastic Supply Inelastic demand curveOriginal quantityOriginal pricePriceAfter-tax quantityQuantityElastic supply curveAfter-tax price for buyerAfter-tax price for sellerTax6A-22