Week 4 -5

• Jeremy Bentham


  The first major advance in the development of consumer demand theory. Coined the term 'utility' - the satisfaction of wants and needs. Developed the notion that people are motivated by desire to maximize utility.
• John Stuart Mill


  Extended and popularized the work of Bentham. Promoted consumer demand principles in number of publications.
• William Stanley Jevons


  A major improvement in consumer demand theory.

  Developed the notion of marginal utility and the Rule of Consumer Equilibrium.
• Utility


  The satisfaction of wants and needs, obtained from the consumption of goods or services. Includes welfare and well-being.
• Total Utility


  The total satisfaction of wants and needs.
• Marginal Utility


  The additional utility, or extra satisfaction of wants and needs gained from an extra unit of goods and services.
• Law of Diminishing Marginal Utility

  • Marginal utility or extra utility obtained decreases as quantity consumed increases. Each additional good consumed is less satisfying than the previous one. Important for insight into market demand and the law of demand.

  
• Budget Constraint


  The limit to expenditure imposed by a cash-limited budget, represented as a straight line in geometrical possibilities between two or more services.
• Indifference Curves


  Rely on a relative ranking of preferences between two goods rather than the absolute measurement of utility. Show how consumers would react to different combinations of products. The slope is the Marginal Rate of Substitution.
• Properties of Indifference Curves

  • Negatively sloped, higher curves represent higher levels of satisfaction, convex to the origin, cannot intersect each other.
• Consumer Sovereignty


  An economic philosophy where consumer demand drives business in a free enterprise system.
• Consumer Surplus


  The extra satisfaction received when purchasing a good or service, expressed as the difference between what the consumer paid and how much extra they would have been willing to pay.
• Production


  The output of goods and services produced by businesses within a market, creating the supply that allows needs and wants to be satisfied.
• Short Run Production


  A period of time when there is at least one fixed factor, usually capital, and the output expands when more variable factors are employed.
• Long Run Production


  A period when all factors of production can change, allowing the business to increase the scale of operations by adding more labor and capital.
• Productivity Stages


  • Stage I: Total product curve has positive slope, marginal product > average product.
  • Stage II: Total product has decreasing positive slope, marginal product = average product.
  • Stage III: Total product curve has negative slope, marginal product < average product.
• Fixed Costs


  Costs that do not vary directly with the level of output.
• Variable Costs


  Costs that vary directly with output, increasing as production rises.
• The total cost is made up of fixed and variable costs.