Theory Of Consumer Choice

Theory of Consumer Choice I think that it is right to begin with the Theory of consumer choice. The above consumer has expressed his preference of choice. He has a taste for seafood which he prefers above all other types of food. This does not mean that he only eats seafood, but in line with the last two elements of the theory of consumer choice, he has shown his preference for taste and on that assumption, will do the best that he can for himself to consume as much seafood as he can. The elements of the theory which govern exactly how much seafood he will consume are the first two, namely the consumers income and the price of seafood.

We can assume therefore, that the consumer will devote as much of his budgeted income for food, to as much seafood as he can afford in preference to other foods such as hamburgers. A budget line can be drawn up to show a trade off between say, fish suppers and hamburgers to indicate the combinations of fish suppers and hamburgers the consumer can afford given his income and the prices of each meal. Points on the buget line will all be within the consumers budget for food. All points below the line will show the possible combinations of dinners avaiable for his choice. All points above the line wil be unaffordable. It will be possible to see how far the consumer could indulge his passion for seafood in one week.

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(Slope of budget line = -Pu/Pv) The next considerations that might be taken are the marginal rate of substitution of one meal for another without changing the total utility, the diminishing marginal rate of substitution which will hold utility constant and representation of taste as indifference curves. I will not elaborate on these at this point as I believe that the marginal utility and diminishing marginal utility are more relevany and pertinent to the question. I shall now contunue by defining utility. In economic jargon, utility is a numerical method of appreciating a consumers satisfaction. The word itself, as far as meaning is concerned, has nothing to do with its meaning in everyday language.

It has nothing to do with usefulness, it is a satisfaction based unit of measurement. Marginal utility on the other hand is, in a sense, an extra utility. What is meant in economic jargon by marginal is the additional pleasure a specific good gives to a consumer. Diminishing marginal utility is the marginal utility lessening due to the growth of consumption. For example, a consumer consumes a pound of fish, and his utility is 10 units, and his marginal utility is 10 units. If the same consumer consumed two pounds of fish, his utility would be 15, but his marginal utility would be 7. The same effect on marginal utility would take place if the amount consumed further increase. Since marginal utility diminishes as the quantity of fish consumed increases, we are faced with diminishing marginal utility.

The point is that no matter how good the the consumers fish dinners are , the more that is consumed, the less satisfaction will the consumer have compared to the initial portion. This of course is down to personal taste, for consumer A may have a diminishing marginal utility that decreases a lot more slowly than consumer B. The fact remains, that at some point, both comsumers will become saturated by their love for seafood and the law of diminishing marginal utility will make itself apparent. Our consumer, as this point, will seek to substitute some of his fish dinners with hamburgers or another alternative. To conclude, the title question based on the argument above, the statement: I love seafood so much I cant get enough of it may be passionate, but economically speaking is implausible.

Even if theoretically speaking the consumer had access to an infinite amount of seafood and an unlimited budget, in the end the good would not satisfy the consumer enough to remain a preferred good, thus this change in preference would result in the consumer literally having had enough. First we must consider suppy and demand. Supply is the quantity of a good that sellers want to sell at every price. Demand is the quantity of a good that buyers want to buy at every price. Equilibrium is the point where the supply is equal to the demand.

At a particular price these behaviours become quantity supply, quantity demand and equilibrium price. We must now look at the elasticity of supply and elasticity of demand. The elacticity of supply measures the responsiveness of the quantity suppled, to a change in the price of that good. Supply elasticity = (% change in quantity supplied) (% change in price) The elasticity of supply informs us how the equilibrium price and the quantity will change if there is a change in the demand. The elasticity of demand shows us the shift in the equilibrium point if there is a change in supply. The elasticity of supply and the elasticity of demand directly affect each other in the following ways.

As seen on the graphs below, the cross section changes. This results in a change of position for the equilibrium point. In the particular case of a 5-pence per gallon tax imposition on petrol, considering that the current price of petrol is roughly 69.6-pence per gallon, there is no drastic shift in the supply curve. Nevertheless, a slight shift in the supply curve triggers a slight shift in the demand curve as shown below. This scenario is better portrayed in the lower left graph of the image below (fig.15.4). Since petrol in England has no substitute or alternative good, (unlike the U.S.), the consumer has no other mean of mobilizing his or her essential equipment of transportation.

This automatically makes the demand elasticity low. It is needless to say that as a result of these minor shifts the deadweight loss is minimal. The producer unlike the consumer, in this case will not be affected in terms of tax incidence, the reason being that as a producer of this specific good, there is no immediate obligation to bear the tax incidence himself, thus the burden of tax is loaded onto the consumer. The legislator, or better known as the government, will suffer no incidence of any sort. The only way the legislator will be affected is through the update of this particular tax, which is an annual bureaucratic budgeting process.

Over the last century many countries throughout the world have experienced inflation as their major economic problem. Expensive wars have traditionally been recognized as the sources of inflation. Governments, in effort to squeeze more production out of an economy, have often resorted to printing or releasing more money to finance the purchase of arms and soldiers1. In an economy already producing at full capacity, the issuing of additional money serves to bid up the prices of the output of the economy, resulting in inflation. It was generally assumed from past experience, that once the economy returned to its normal state, the persistent tendency for overall prices to rise would disappear, bringing inflation rates back to normal. World War II brought the persistent inflation that economists came to expect. In the 50’s and early 60’s inflation resumed to very low rates concomitant with large growth increases and low unemployment.

But, from 1967 to 1974 the rates of inflation reached alarming proportions in many countries, such as Japan and Britain, for no apparent reason. This acceleration in inflation has forced many economists to reevaluate their views, and often align themselves with a specific school of thought regarding the causes and cures for inflation. There are two opposite theories regarding inflation. Monetarism indicates that inflation is due to increases in the supply of money. The classic example of this relationship is the inflation that followed an inflow of gold and silver into Europe, resulting from the Spanish conquest of the Americas. According to monetarists, the only way to cure inflation is by government action to reduce growth of the money supply.

At the other end is the cost-push theory. Cost-pushers believe that the source of inflation is the rate of wage increases. They believe that wage increases are independent of all economic factors, and generally are determined by workers and trade unions. More specifically, inflation occurs when the wages demanded by trade unions and workers add up to more than the economy is capable of producing. Cost- pushers advocate limiting the power of trade unions and using income policies to help fight off inflation. In between the cost-push and monetarism theory is Keynesianism.

Keynesians recognize the importance of both the money supply and wage rates in determining inflation. They sometimes advise using monetary and incomes policies as complimentary measures to reduce inflation, but most often rely on fiscal policy as the cure. Before we can understand the policies suggested by these different schools of thought, we must look at the historical development of our under …


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