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Principles Of Microeconomics Essay

5770 words - 24 pages

Principles of MicroeconomicsConsumer Theory: - It possible to describe the choices of consumers. Consumer can refer to a family or it can refer to the government of a country, too. He can choose form only 2 products: x and y. Products refer to a singe product or service that is consumed, a group products. X could represent consumer goods and y capital goods. Consumers have limited resources. They wish to have more of y and they give up some of x and vice versa.Y = The total budget, y, has to be spent on the 2 products. (Budget = p * q).Px and Py = the price of the products.qx and qy = the quantities consumed.Budget line is Y = px qx + py qyUtility & Indifference Curves: We assume that ...view middle of the document...

U' = - Δy / ΔxOpportunity Cost & Marginal rate of Substitution: -This ratio shows how much y we have to give up to increase the consumption of x by 1 unit, which is the Opportunity Cost (OC). And shows how much y is needed to substitute x so as to stay on the same utility level, U3 it is the Marginal rate of Substitution (MRS(xy)).Opportunity Cost (OC) : - How much you give up 1 substance to get from the other one.Consumer Equilibrium: - We assume that consumers are rational and strive to maximize their utility level at any given budget constraint. Point C is the best choice, since here the satisfaction level is the highest, U3. Therefore, it is the Optimum consumption point for the consumer. Chosen point C in this case the consumer is in Equilibrium. In such a situation that he has no interest to change, since it provides the highest attainable utility. Consumer Equilibrium is one of the basic pillars of Microeconomics. We can set up a model of consumers that explains how they make economic decisions.At point C the slope of IC coincides with the slope of the BL, Therefore Consumer Equilibrium occurs only and only when: -OC = MRS(xy) = U' = - (Δy / Δx) = - (px / py)Indifference Curves & the Budget Line.Theory Of Demand: - Rational consumer always makes the best choice, of the prices of the products and the budget he has to buy the products. If price of x decreases then more x can be bought from the same budget. The vertical intersect will not change, but the horizontal one will shift out from A to B.The effect of Price: - As the Price of x reduces the Quantity of x goes up and your demand curve goes up. So you chose the curve with the heist satisfaction. the lower the price of x the higher the consumption of x.The Law of Demand: -The price of a product and the quantity consumed is inversely related to each other. Which is true for most of the products we consume. If we alter the price of a product, ceteris paribus, the quantity demanded will inversely be related to price.Demand is what wanted by people.(If price increases, the quantity demanded decreases)(If price decreases, the quantity demanded increases)px = Independent.qx = dependent.Formal of the Demand Curve: - qx = ƒ (px).When the Price of the Quantity demanded changes, cause a Movement along the demand curve. Inverse relationship between 2 endogenous variables in a proper form, indicating that the slope is negative. q'x < 0.Quantity demanded: - Is an economic variable (qx), like the price of the products is (px). Demand (D), A functional relationship between the price of the product and the quantity demanded. The synonyms for Demand are (Demand - Function/Schedule/Curve). Demand Curve tells us what the quantity will be for a certain price.The Market demand curve is obtained as the horizontal summation of the individual demand curves.Most of the good have a Downward Sloping demand curve, some have strange behavior (cars Lamborghini or Rolls Royce...

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