Surplus and shortages

- At any above-equilibrium price, quantity supplied exceeds quantity demanded. This is a surplus or excess supply.

- The surplus cause price reduction by sellers, that encourages consumers to buy more. The market moves to its equilibrium.

•Any pricebelow the equilibrium price creates a shortage; quanty demanded now exceeds quantity supplied.

•Buyerstry to obtain the product by offering to pay more for it; this drivers the price upward toward its equilibrium level. Again the market moves to its equilibrium.

Theory of consumer behavior: Utility – maximizing rule.

Consumer behavior -the idea of diminishing marginal utility explains also how consumers allocate…

There are 2 theories of consumer behavior:

• the marginal utility theory of consumer

• the indifference curve theory (теория кривой безразличия)

The marginal utility theory

• assumers that utility is numerically measurable

• the consumer is assumed to be able to say how much utility he/she derives from each extra unit of product

•the consumer needs this information to realize the utility – maximizing or equilibrium position

• this position (suppose, for goods, a, b, c) is indicated as:

MUa/Pa=MUb/Pb=MUc/Pc

The indifference curve theory

the equilibrium is based on:

- Budget line (shows all combinations of any two products which can be purchased, given the prices of the products and the consumer’s money income).

- Indifference curve (each point represents some combination of products of a and b, these combinations are equally satisfactory to the consumer and yield the same total utility).

Utility -Is want-satisfying power.It is satisfaction or pleasure one gets from consuming it.

Characteristic of utility:

• “utility” and “usefulness” are not synonymous. Works of art may be useless functionally.

• utility is subjective. The utility of a specific product will vary widely from person to person.

• utility is difficult to quantify. We assume that people can measure satisfaction with utils – units of utility.

Total utility (TU)

• is the total amount of satisfaction or pleasure a person derives from consuming some specific quantity of goods or services.

Marginal utility (MU)

• is the changes in total utility resulting from consumption of one more unit of product.

MU=дельтаTU/дельтаQ

Marginal utility is extra satisfaction a consumer realize from an additional unit of that product.

Theory of consumer behavior: the budget line and the indifference curve.

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