The consumer’s objective is to allocate the available budget in a manner that will maximize total utility. In order to achieve this goal, the consumer must choose the most reasonably priced combination of goods at which the total of the utilities acquired from all goods consumed is as big as feasible. In order to be able to find the best budget allocation for the consumer, we can use the utility maximizing rule, which consists of two things; allocating the full amount of the accessible budget and making the marginal utility per dollar equivalent for all of the goods.
To allocate the full amount of the available budget you have to come up with combinations that reach the entire available budget. You want to maximize total utility because you want to get the most for your dollar when you are facing scarcity. You do not have to literally use your entire amount of money on purchases, allocating a budget can involve saving money as well. You can decide the amount of money you want to save, and spend the rest on goods. Equalizing the marginal utility per dollar can be achieved by creating a combination that formulates the marginal utility per dollar equivalent for both of the goods. Marginal utility per dollar is the marginal utility from a good matched to the cost of the good. You are able to calculate the marginal utility per dollar by dividing the marginal utility of a good by the price of that good. In order to be able to find the utility maximizing choice, you calculate the marginal utility per dollar for only the most reasonable priced combinations that deplete your entire budget.
Thursday, February 25, 2010
Friday, February 19, 2010
Excludable and Rival Goods
An Excludable good or service is the possibility of preventing a person from enjoying its advantages if they have not paid for it. Examples of excludable goods are Brinks Security, any sort of concert that you have to pay in order to be able to see. Non excludable gods or services are those that are made to be extremely difficult to avert someone from enjoying it, for instance the police department of a city, or the fisheries. Anyone has access to fisheries or to the help of a police officer.
A good or service is considered to be rival it its utility by a person decreases the available amount for another person. For instance a security company such as Brinks may work for more than just one Bank, but the truck they use to transport money to the banks at the same time. Non rival goods or services are those whose use by a person doesn’t reduce or diminish the amount available for others. For instance, the services a police department and a concert on television are non rival.
Private goods excludable as well as rival because they can be consumed only by one person at a time that has purchased it or owns it. Public goods are nonrival and excludable because they can be consumed by any person at anytime and nobody can be barred from using it. Common resources are rival and no excludable because one part of it can be used on one time, but nobody can be barred from using it. Natural monopolies are nonrival and excludable because they are able to produce at a lower expense than two or more other firms are able to.
A good or service is considered to be rival it its utility by a person decreases the available amount for another person. For instance a security company such as Brinks may work for more than just one Bank, but the truck they use to transport money to the banks at the same time. Non rival goods or services are those whose use by a person doesn’t reduce or diminish the amount available for others. For instance, the services a police department and a concert on television are non rival.
Private goods excludable as well as rival because they can be consumed only by one person at a time that has purchased it or owns it. Public goods are nonrival and excludable because they can be consumed by any person at anytime and nobody can be barred from using it. Common resources are rival and no excludable because one part of it can be used on one time, but nobody can be barred from using it. Natural monopolies are nonrival and excludable because they are able to produce at a lower expense than two or more other firms are able to.
Thursday, February 11, 2010
Negative Production and Consumption Externalities
An externality is a cost or subsidy which comes from production and falls on anyone but the producer. It can also be a cost or subsidy that comes from consumption and falls on someone apart from the consumer. A negative externality is one that inflicts external cost.
Negative production externalities are when someone other than the producer of that occurrence is being affected. For instance, clearing forests destroys the wildlife habitat and reduces the amount of carbon dioxide that plants naturally release into the atmosphere, which creates an enduring affect on temperature. Another example could be talking during a lecture in class. While someone may be having a conversation during a lecture, those who surround that person may become distracted from the lecture and experience a hard time comprehending or even listening to their professor. Examples of negative consumption externalities include smoking in restricted areas. Smoking affects people’s health and may be unpleasant to a person who is sensitive to the fumes. Certain restaurants, bars/clubs, and airlines ban smoking in an attempt to prevent negative consumption externalities, but on the other hand, this creates a negative consumption externality on those who prefer to smoke or take pleasure in while they are eating, drinking or partying, or flying.
Negative production externalities are when someone other than the producer of that occurrence is being affected. For instance, clearing forests destroys the wildlife habitat and reduces the amount of carbon dioxide that plants naturally release into the atmosphere, which creates an enduring affect on temperature. Another example could be talking during a lecture in class. While someone may be having a conversation during a lecture, those who surround that person may become distracted from the lecture and experience a hard time comprehending or even listening to their professor. Examples of negative consumption externalities include smoking in restricted areas. Smoking affects people’s health and may be unpleasant to a person who is sensitive to the fumes. Certain restaurants, bars/clubs, and airlines ban smoking in an attempt to prevent negative consumption externalities, but on the other hand, this creates a negative consumption externality on those who prefer to smoke or take pleasure in while they are eating, drinking or partying, or flying.
The Ability-to-Pay Principle
The ability-to-pay principle is the proposal that people ought to pay taxes in accordance to how easily they are able to tolerate the tax. This principle entails comparing and evaluating people along two components, which are horizontally and vertically.
Horizontal equity is the obligation that taxpayers with the equal ability to pay taxes should pay the exact same taxes. It is easy to consent to in principle, but it is tough to apply and practice it. It is not difficult to apply horizontal equity to those who are the same in every matter,. The greatest obstacle is when you have to evaluate the disparity in the aptitude to pay that comes from the condition of a person’s wellbeing and from their domestic responsibilities.
Vertical equity is the obligation that taxpayers with a greater aptitude to tolerate a greater portion of taxes. This proposal is easily interpreted that those with higher income ought to pay higher taxes, at the same time; it is difficult to conclude the point of how much taxes should rise when income rises. The U.S tax code utilizes progressive income taxes, which is the standard tax rate that rise with income. They are thought to be reasonable and fair on the foundation of the vertical equity notion, but their utilization to attain vertical equity creates an issue for achievement of horizontal equity. A good example of this issue is the tax code for single and married people.
Horizontal equity is the obligation that taxpayers with the equal ability to pay taxes should pay the exact same taxes. It is easy to consent to in principle, but it is tough to apply and practice it. It is not difficult to apply horizontal equity to those who are the same in every matter,. The greatest obstacle is when you have to evaluate the disparity in the aptitude to pay that comes from the condition of a person’s wellbeing and from their domestic responsibilities.
Vertical equity is the obligation that taxpayers with a greater aptitude to tolerate a greater portion of taxes. This proposal is easily interpreted that those with higher income ought to pay higher taxes, at the same time; it is difficult to conclude the point of how much taxes should rise when income rises. The U.S tax code utilizes progressive income taxes, which is the standard tax rate that rise with income. They are thought to be reasonable and fair on the foundation of the vertical equity notion, but their utilization to attain vertical equity creates an issue for achievement of horizontal equity. A good example of this issue is the tax code for single and married people.
Barriers to Efficiency
There are barriers that cause underproduction and over production when it comes to efficiency. These barriers include price and quantity policies, taxes and subsidies, externalities, public goods and common resources, monopoly and high transaction costs.
Price policies can deter price changes that set equilibrium for quantity demanded and quantity supplied. Take for example rent prices for apartments. There is a limit on the maximum amount that landlords can charge their renters. Quantity policies are able to set a maximum value on the amount of goods that can be produced which can lead to underproduction. The government can set up a limit on the amount of crop farmers can produce, which can result in underproduction.
Taxes raise the prices paid by consumers or buyers and decrease the prices obtained by sellers. This leads to a decrease in the quantity produced and results in underproduction. Subsidies are imbursements to producers given by the government. This decreases prices paid by consumers or buyers and increases the prices obtained by sellers.
An externality is a cost or gain that affects another person, but not the seller of that buyer of a good or service. It can result in overproduction if there is external cost, for instance burning coal to produce electricity causes acid rain and can spoil crop. The plant that is producing air pollution by burning coal does not consider the cost of the pollution, and creates overproduction. An external benefit can occur if an apartment owner chose to install a smoke detector, this would beneficial to her neighbor as well. But she does not consider her neighbor’s benefit, and chooses to not install a smoke detector. This leads to underproduction.
Public goods are benefits that everyone experiences and nobody can be rejected from these benefits. Public goods can lead to underproduction. Uncongested non-toll roads are an example of public goods. Common resources are not owned by anyone and are used by everyone. For instance, air is a common resource; everyone is able to breathe air and cannot be excluded from using it.
A monopoly is a company or business that is the only supplier or a good or service. Cable television is supplied by companies that are monopolies. Maximization of profit is the self-interest of a monopoly. Since monopolies don’t have competitions, they are able to set their own price. Monopolies can lead to underproduction because they don’t produce enough and charge a high price.
High transaction costs is the opportunity costs of creating or performing trades in a market. The stores in a shopping mall are markets that utilize large quantities of limited labor and capital supply. The opportunity cost must be worth tolerating for founding or launching a market. If transaction costs are too high, than it may lead to underproduction in the market.
Price policies can deter price changes that set equilibrium for quantity demanded and quantity supplied. Take for example rent prices for apartments. There is a limit on the maximum amount that landlords can charge their renters. Quantity policies are able to set a maximum value on the amount of goods that can be produced which can lead to underproduction. The government can set up a limit on the amount of crop farmers can produce, which can result in underproduction.
Taxes raise the prices paid by consumers or buyers and decrease the prices obtained by sellers. This leads to a decrease in the quantity produced and results in underproduction. Subsidies are imbursements to producers given by the government. This decreases prices paid by consumers or buyers and increases the prices obtained by sellers.
An externality is a cost or gain that affects another person, but not the seller of that buyer of a good or service. It can result in overproduction if there is external cost, for instance burning coal to produce electricity causes acid rain and can spoil crop. The plant that is producing air pollution by burning coal does not consider the cost of the pollution, and creates overproduction. An external benefit can occur if an apartment owner chose to install a smoke detector, this would beneficial to her neighbor as well. But she does not consider her neighbor’s benefit, and chooses to not install a smoke detector. This leads to underproduction.
Public goods are benefits that everyone experiences and nobody can be rejected from these benefits. Public goods can lead to underproduction. Uncongested non-toll roads are an example of public goods. Common resources are not owned by anyone and are used by everyone. For instance, air is a common resource; everyone is able to breathe air and cannot be excluded from using it.
A monopoly is a company or business that is the only supplier or a good or service. Cable television is supplied by companies that are monopolies. Maximization of profit is the self-interest of a monopoly. Since monopolies don’t have competitions, they are able to set their own price. Monopolies can lead to underproduction because they don’t produce enough and charge a high price.
High transaction costs is the opportunity costs of creating or performing trades in a market. The stores in a shopping mall are markets that utilize large quantities of limited labor and capital supply. The opportunity cost must be worth tolerating for founding or launching a market. If transaction costs are too high, than it may lead to underproduction in the market.
What influences price elasticity of demand?
There are two things that have an influence on price elasticity of demand; Accessibility of substitutes and the quantity of income that is spent.
If a substitute is easy to find, than the demand of a good or product is elastic. In other words, if something such as an ingredient can be replaced by another ingredient, then the good that is produced with either of those ingredients it elastic. If a substitute is difficult to find, than the demand of that product is inelastic. For instance, oil has inelastic demand because it has insufficient substitutes. It is needed to operate transportation devices such as cars, buses, boats, etc. There are three factors that contribute an influence on the aptitude to obtain a substitute from a good or product. These factors are whether the good is a luxury or a requirement, how scarcely defined it is, and the time it takes to find its substitute. Necessities are inelastic because they don’t have good substitutes, and luxuries have an elastic demand because they are not a requirement. The demand for a scarcely defined good is elastic. For instance, there are many different types of coffee drinks, such as cappuccinos, Starbucks and Indigo Coffee both makes cappuccinos. Coffee itself is inelastic, because there is no substitute that is like it. Tea, for instance is not the same as coffee it does not consist of the same ingredients. The more time that has passed since the change in price of a good occurred, the greater the elasticity becomes of demand for a good. When gas prices went up recently, the demand for gas did not change, instead people switched to more fuel efficient cars, and that is what caused the amount of fuel demanded to decrease-in which the demand became more elastic.
People are not able to purchase the same amount of goods and services as they once did when prices rise and income decreases. The greater the amount of income is spent on a good, the greater the influence of a rise in price on the amount of that good or service that people are able to meet the expense of purchasing, which results in a more elastic demand.
If a substitute is easy to find, than the demand of a good or product is elastic. In other words, if something such as an ingredient can be replaced by another ingredient, then the good that is produced with either of those ingredients it elastic. If a substitute is difficult to find, than the demand of that product is inelastic. For instance, oil has inelastic demand because it has insufficient substitutes. It is needed to operate transportation devices such as cars, buses, boats, etc. There are three factors that contribute an influence on the aptitude to obtain a substitute from a good or product. These factors are whether the good is a luxury or a requirement, how scarcely defined it is, and the time it takes to find its substitute. Necessities are inelastic because they don’t have good substitutes, and luxuries have an elastic demand because they are not a requirement. The demand for a scarcely defined good is elastic. For instance, there are many different types of coffee drinks, such as cappuccinos, Starbucks and Indigo Coffee both makes cappuccinos. Coffee itself is inelastic, because there is no substitute that is like it. Tea, for instance is not the same as coffee it does not consist of the same ingredients. The more time that has passed since the change in price of a good occurred, the greater the elasticity becomes of demand for a good. When gas prices went up recently, the demand for gas did not change, instead people switched to more fuel efficient cars, and that is what caused the amount of fuel demanded to decrease-in which the demand became more elastic.
People are not able to purchase the same amount of goods and services as they once did when prices rise and income decreases. The greater the amount of income is spent on a good, the greater the influence of a rise in price on the amount of that good or service that people are able to meet the expense of purchasing, which results in a more elastic demand.
Wednesday, February 10, 2010
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