Theory Of Production.

 

Production refers to the economic process of converting of inputs into outputs. Production uses resources to create a good or service that is suitable for exchange. This can include manufacturing, storing, shipping, and packaging. Some economists define production broadly as all economic activity other than consumption. They see every commercial activity other than the final purchase as some form of production.

Production is a process, and as such it occurs through time and space. Because it is a flow concept, production is measured as a “rate of output per period of time”. There are three aspects to production processes:

1. the quantity of the good or service produced,
2. the form of the good or service created,
3. the temporal and spatial distribution of the good or service produced.

A production process can be defined as any activity that increases the similarity between the pattern of demand for goods and services, and the quantity, form, shape, size, length and distribution of these goods and services available to the market place.

Factors of production 

he inputs or resources used in the production process are called factors of production by economists. The myriad of possible inputs are usually grouped into six categories. These factors are:

• Raw materials
• Machinery
• Labour services
• Capital goods
• Land

Lecture Note Series No:6

Budget Line

A consumer's budget line characterizes on a graph the maximum amounts of goods that the consumer can afford. In a two good case, we can think of quantities of good X on the horizontal axis and quantities of good Y on the vertical axis. A budget constraint  or Budget Line represents the combinations of goods and services that a consumer can purchase given current prices with his or her income. Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices.

 

Term budget line Definition: The alternative combinations of two different goods that can be purchased with a given income and given prices of the two goods. This budget constraint, also termed budget constraint, plays a major role in the analysis of consumer demand using indifference curve analysis. Indifference curves represents the "willingness" aspect of consumer demand, the budget line captures the "ability". One key consumer demand topic is to analyze how consumer equilibrium is affected by changes in the price of one good. Then end result of this analysis is a demand curve. For more fascinating uses of the budget line and indifference curves, and consumer demand analysis, see income-consumption curve and price-consumption curve.

Lecture Note Series No:5b 

Theory of Consumer Behavior

 

The Theory of Consumer Behavior, like the Law of Demand, can be explained by the Law of Diminishing Marginal Utility.Consumer Behavior is how consumers allocate their money incomes among goods and services.

In economic theory, consumer behavior is addressed within the concepts of consumer preference and consumer surplus. Consumers' surplus is the excess amount a consumer is willing to pay for a good, as opposed to doing without it, over the amount actually paid for the good. A consumers' surplus can exist only within the context of the concept of diminishing marginal utility. This concept holds that, at some point, consumption of additional incremental quantities of a good will yield successively smaller increases in utility. Thus, it is assumed that an individual will be willing to pay more for the first unit of consumption than for a unit consumed at some point further along.

Consumer Choice and Budget Constraint:

• Rational behavior:
  • The consumer is a rational person, who tries to use his or her money income to derive the greatest amount of satisfaction, or utility, from it. Consumers want to get "the most for their money" or, to maximize their total utility. Rational behavior also "requires" that a consumer not spend too much money irrationally by buying tons of items and stock piling them for the future, or starve themselves by buying no food at all. Consumers (we assume) all engage in rational behavior.
• Preferences:
  • Each consumer has preferences for certain of the goods and services that are available in the market. Buyers also have a good idea of how much marginal utility they will get from successive units of the various products they might purchase. However, the amount of marginal & total utility that the people will get will be different for every individuals in the group because all individuals have different taste and preferenes.
• Budget Constraint:
  • The consumer has a fixed, limited amount of money income. Because each consumer supplies a finite amount of human and property resources to society, he or she earns only limited income.
  • Every consumer faces a budget constraint
  • There is infinite demand, but limited income
• Prices:
  • Goods are scarce because of the demand for them. Each consumers purchase is a part of the total demand in a market. However, since consumers have a limited income, they must choose the most satisfying combination of goods based partially on prices. For producers, a lower price is needed in order to induce a consumer to buy more of their product.
  
  Lecture Note Series No: 5

elasticity ?

The degree to which a demand or supply curve reacts to a change in price is the curve's elasticity. Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high. 

A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.

To determine the elasticity of the supply or demand curves, we can use this simple equation:

Elasticity = (% change in quantity / % change in price)

If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic. 

 Lecture Series No: 4

Tutorial Note.

The Concept of Market Equilibrium

Market Equilibrium is the point at which total supply and demand within a market are equal, shown by the intercept of a demand curve and a supply curve when both are graphed on the same axis. The price at this point is market equilibrium price and the quantity is market equilibrium quantity. Within most markets market equilibrium will naturally be reached. For everything that is supplied to be consumed and for the market to be "cleared," price must be equal to or lower than equilibrium price. 

  

Excess Demand and Supply.

 If price is set below equilibrium price, supply will decrease and demand will increase, as stated in the laws of demand and supply. This means there is excess demand compared to supply and a shortage will develop because there is not enough supply to meet demand. Consumers will be willing to pay more and a black market may develop, but market price will eventually rise to market equilibrium price.

If a price is set above equilibrium price, supply will increase and demand will decrease, as stated in the laws of demand and supply. This will cause excess supply and a surplus of goods and services supplied will develop that consumers do not demand. The market will not be "cleared" and stock will remain, so prices will be decreased by producers to sell this surplus stock so the market can be "cleared." 

Lecture Notes Series No.2

Principles of Economics:

Microeconomics is the study of the decisions of individuals, households, and businesses in specific markets, whereas macroeconomics is the study of the overall functioning of an economy such as basic economic growth, unemployment, or inflation. Scarcity in microeconomics is not the same as poverty. It arises from the assumption of very large (or infinite) wants or desires, and the fact that resources to obtain goods and services are limited.

• wants exceed resources necessary to obtain them
• therefore we must make choices
• every choice leads to a cost

Lecture Notes Series No.1