00:00:00 - 00:00:20
Introduction to Consumer and Producer Behaviour
We discussed consumer behaviour. Let me write on the left panel
consumer behaviour and on the right we define what producer behaviour.
Now how do we measure the satisfaction a consumer gets?
00:00:21 - 00:01:07
Utility Function and Production Function
But consumer good is measured by the utility function, by a utility
function. So if you consume an ice cream today on a sunny afternoon, you
are doubly happy and you get a utility of say 100 units. That's your
satisfaction, that's your utility. And analogous things comes from
production, but it's something which you can observe. And what is that
your output. So for the firm, if I give the inputs, there's a black box or
technology that churns inputs to output and that's captured by the
production function.
00:01:07 - 00:02:50
Principle of Diminishing Returns
Where Q is output produced depends on F. It's a technology on the inputs
labour and capital. So L for labour, K for capital, utility depends on your
consumption of the goods. X can be coffee, Y can be sandwiches. Here we
are learn the notion of principle of diminishing marginal utility. That
means as you consume more units of the same good, the addition to total
utility of each extra unit consumed diminishes as you consume more
units. As analogous thing happens for producers also and which is called
the principle of diminishing marginal productivity. That is, the marginal
productivity of labour decreases as the number of units of workers are
hired. That means my marginal productive labour goes down as labour
increases. The money productive capital goes down as capital increases.
Now if a production function exhibits these properties, then I say that they
exhibit the principle of diminishing returns. Next, we discussed the
optimal choice for a consumer.
00:02:53 - 00:04:55
Optimal Consumer Choice and Budget Constraint
That means what is the level of X&Y or coffee and sandwich I want to
consume to maximize my utility? And how did we find that we have to
solve an optimization problem? We maximized utility. We took a particular
example X * Y subject to the budget constraint twenty X + 40 Y equal to
200. This was the income. Q is the price of X that is coffee, 40 is the price
of Y that is sandwiches. And it turned out the optimal consumption bundle
is obtained from the expression. Number one was what you stop at the
level where the marginal utility of spending ₹1.00 on coffee is equal to the
marginal utility of spending ₹1.00 on sandwiches. That is MU X / P XMUY
over PY and from there on we obtain expression between X&Y was X equal
to two Y. Agreed. Once we obtain this what we did, we need to plug this
into the budget equation. That is, this is the budget line because you are
constrained by this to obtain what the value of X is and what the value of
Y is. Is this clear to everybody? So that gives us the optimal consumption
bundle. So for the firm the analysis is what is the level of output that
maximizes profits?
00:04:58 - 00:05:44
Profit Maximization for Firms
Consumer maximize utility first maximize profit symbols a mirror opposite.
How do I do it? I will stop at that level of output at which my marginal
revenue is equal to marginal cost. That means if producing one more unit
of bicycle the margin revenue I get is rupees 10 and the margin account
cost I get is incur I guess is 10, then I do not have an incentive to
reallocate my production because I am at the best point. Having said this,
we discussed two other written notions relating consumer behaviour and
producer behaviour.
00:05:45 - 00:06:01
Consumer and Producer Surplus
So this is consumer behaviour and producer behaviour. We discuss what is
the notion of consumer surplus.
00:06:02 - 00:08:40
Cost Concepts and Market Participation
Now what does this means? Well, suppose you want to go to a concert,
may be of your favorite singer sing and you have in mind that the
maximum amount you want to pay for ticket is say rupees 1000. But it
turns out that that the price of the tickets is only rupees 800. So in your
mind you have a net benefit of 1000 -, 800 which is 200 or which is your
consumer surplus? That's the incentive for consumers to participate in the
market or else why will I participate in the market, right. I am getting
something more from the market, hence I am participating in. And
analogous thing also applies for producers. A producer may be willing to
supply coffee at a price of 100, but it turns out that the market is giving
him a price of 130, so it gets an extra benefit of 130 -, 100, which is 30. So
this extra is the producer's surplus and this gives the produce an incentive
to participate in the market. That's the reason why would I invest. That's
the reason why would I invest in innovation and so on and so forth. And I
showed you how you can compute consumer surplus given the demand
curve. How you can construct or obtain producer surplus given a supply
curve is a mine, the seller's problem and how farms decide how much to
produce. We introduced the various notions of cost, fixed cost, variable
cost, average cost, so on, so forth. We discussed optimal selling choices
based on the marginal revenue and marginal cost. Finally, we explained
producer surplus and the gains firms obtained from participating in
markets. Together, these concepts help managers understand how value
is created and shared between buyers and sellers in markets.