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CONSUMER CHOICE THEORY, Slides of Managerial Economics

The concept of consumer choice theory, opportunity cost, cost-benefit analysis, and utility analysis. It also discusses the characteristics of indifference curves, budget constraints, and budget lines. examples to explain the concepts and their applications.

Typology: Slides

2021/2022

Available from 02/17/2022

Chabbysuke
Chabbysuke 🇵🇭

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CONSUMER CHOICE
THEORY
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CONSUMER CHOICE

THEORY

CONSUMER

 Is an individual or a household composed of one

or more individuals.

 Is the basic economic unit that determines which

commodities are purchased and in what

quantities

UNLIMITED WANTS CONSUMERS

VS.

CONSTRAINTS MAXIMIZE SATISFACTION

CHOICES

INDIVIDUAL TRADE
OFFS
 Example: Spending
more time on
homework studying
 Trade Off – Not
watching T.V., Talking
to friends, playing
sports etc.

BUSINESS

TRADE OFF

A CEO decides to lay off workers to save money. The desire to make more money is driving the decision. What is the trade off?

OPPORTUNITY COST

 Another name for relative price

 Is the price of one good in terms of another good

 Foregone value of the next best alternative in a

given action

 Varies from person to person

COST-BENEFIT ANALYSIS

 Decision-making process in which you compare

what you will sacrifice and gain by a specific action

MARGINAL COST – extra cost of adding one unit

MARGINAL BENEFIT – extra benefit of adding

one unit

MARGINAL COST & MARGINAL BENEFIT

FORMULA:

MC = CHANGE IN TOTAL COST/CHANGE

IN QUANTITY

MB = CHANGE IN TOTAL BENEFIT /

CHANGE IN QUANTITY

DECISION

MB = MC : Efficient and productive MB > MC : Continue Consuming MB < MC : Not Consume

 Toy Empire now needs to determine its marginal benefits.
They begin this process by holding focus groups with
consumers in their target markets to understand their
average purchase price points. The company can then use this
primary research to estimate their average marginal benefit,
which in this case is P15.
 WHAT IS THE NET BENEFIT?
ANSWER: P9.00 per unit

MARGINAL COST

Quantity Total Cost Marginal Cost 0

1

2

3

4

5

NET MARGINAL BENEFIT/ (COST)

Quantity Total Revenue Total Cost Profit/ Loss MB MC Net Marginal Benefit/ Cost DECISION 1 35 30 5 35 30 5 Continue 2 45 40 5 10 10 0 Efficient 3 57 49 8 12 9 3 Continue 4 67 67 0 10 18 -8 Not continue 5 72 77 -5 5 10 -5 Not continue

Limited Resources & Unlimited Wants

Scarcity

Choices

Opportunity Cost