Income Elasticity / Branding
Income elasticity of demand is used to determine if a good is
normal or inferior.
What someone wants depends on their _____
Preferences
What is the Law of Diminishing Marginal Utility
Tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point
Ex: eating the first slice of pizza is the best, after eating the 6th slice you may feel sick
The substitution effect is derived from _______
rational spending rule
We assume firms maximize profit because
shareholders expect managers to maximize the value of their investment.
Income Elasticity of Demand
%△ in quantity demanded / %△ in income
(△Q / Q) / (△I/I)
The income effect is easily explained:
Higher price means a consumer can purchase fewer units of a good.
Therefore, people can consume less of a good when its price increases.
Increasing consumption _____ marginal utility
reduces
What is the The substitution effect
Buyers switch to substitutes when price increases.
A rational person has
goals and objectives and tries to fulfill those goals as best they can.
Businesses use ______ to convince customers that
their product is unique and has no close substitutes
branding and marketing
Utility
the subjective satisfaction people derive from consumption
Reducing consumption _____ marginal utility
increases
Rational Spending rule requires
𝑀u𝑥 / P𝑥 = 𝑀u𝑦 / P𝑦
to achieve maximum utility
ESOP
Employee Stock Ownership Plan
Branding and marketing is ______ which is an effort
to create some degree of _______
product differentiation, monopoly power
(thus so the firm can have pricing power)
Total utility
the amount of utility someone receives from consuming x units of a good
At what point should a person stop consuming a single good?
1. Consume until the marginal utility becomes zero.
2. Consume until income is exhausted.
What should happen if good x has a greater marginal utility compared to good y in order to satisfy the rational spending rule?
Consuming more of good x decreases 𝑀u𝑥 / P𝑥
Consuming less of good y increases 𝑀u𝑦 / P𝑦
Both these changes start to bring the scale into balance.
What are the conditions for a perfectly competitive market?
1. All firms sell the same standardized product.
2. Many buyers and many sellers, each of which buys or sells only a
small fraction of the total quantity exchanged.
3. Productive resources are mobile.
4. Buyers and sellers are well informed.
Marginal utility (MU):
the increase in total utility from consuming an additional unit of a good
△ utility / △ consumption
What is the Rational Spending Rule?
Spending should be allocated across goods so that the marginal utility per dollar is the same for each good
What is Imperfect competition?
A firm that has some control over the market price of its product operates in an imperfectly competitive market.
"price setter"