Franciscan College of the Immaculate Conception,

Baybay, Leyte, Incorporated

Baybay City 6521, Leyte
Philippines

COLLEGE OF BUSINESS MANAGEMENT AND

ADMINISTRATION MODULE

BA Core 11: 1
Basic Microeconomics
Management

ACADEMIC YEAR 2021-2022 l FIRST SEMESTER

Learning Facilitator: LOLITA M. ALBA

First Semester, Module 1
First Semester -Module 1
BA Core 11: Basic Microeconomics

Welcome Back to School!

How are you? I am Lolita M. Alba, your learning facilitator
for this course: BA Core 11: Basic Microeconomics.

With your cooperation and support, we will be able to

continue our education despite limitation. According to one
writer: This year is a crucial year and it’s really important for us to play by the rules, things
will run smoothly again, we will all be safe and be able to finish off were we started.

Read the course outline and make it a part of your study habit to refer to your outline
and be guided with what’s next and most of all comply the activities in your module.

Please be reminded of the following module guidelines:

 Learning modules will be distributed on a quarterly basis – prelim, midterm, prefinals

and finals. Make sure your cp#s and email address are correct.
 Reading materials with references/links and other requirements will be downloaded to
your registered Gmail accounts via Google classroom;
 Class meeting will be done via Google meet, for discussions and presentations. Our
class will create a group chat account in the messenger where we can discuss our
concerns, if internet connections is unstable;
 Please always keep posted, and enjoy as we educate ourselves through virtual
learning.

Let us make our study more fun.

Email address: [email protected]

[email protected]
CP#09569262501

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BA Core 11: Basic Microeconomics

FCIC VISION
Inspired by the Blessed Virgin Mary, the Immaculate Conception and living out the Franciscan
Spirituality, we envision ourselves as a Christ – centered, academically – innovative, and socially –
responsive community, committed to evangelizing and witnessing the Gospel values toward the
realization of the fullness of life.
FCIC MISSION
Moved by the Life of Blessed Maria Theresia Bonzel, we commit ourselves to:
 Integrate and strengthen the witnessing of the Gospel values in curricular and co –
curricular programs and activities;
 Promote and intensify lived – adoration to the Blessed Sacrament;
 Create and sustain opportunities for the development of creative and critical thinking skills
among stakeholders;
 Advocate responsible stewardship programs and activities for a sustainable family,
community, and environment;
 Establish collaboration to enhance linkages and partnerships in and outside the school
community.
FCIC GOALS
 Provide Christian Formation programs and activities with Religion as the core of the
curriculum.
 Create opportunities in understanding and valuing the devotion to the Blessed Sacrament.
 Offer growth opportunities for technical, vocational, and professional skills and engage in
providing avenues for lifelong learning.
 Empower community to become stewards of the dignity of life and environment.
 Establish and nurture linkages with church, government, and non – government
organizations.
CORE VALUES: INTEGRITY, RESPONSIBLE STEWARDSHIP, EXCELLENCE,
COMPASSION, PEACE
METAPHOR: LIGHTHOUSE
EXPECTED GRADUATE OUTCOMES
Morally Upright
 Christ – centered individuals who nurture Marian and Franciscan Spirituality
 Model of the lived – adoration of Blessed Maria Theresia Bonzel.
Lifelong Learner
 Learns and works independently and collaboratively to live harmoniously for sustainable
family and community.
 Translates knowledge and skills generated from Translates knowledge and skills generated
from knowledge and skills generated from research and other sources to improve quality of
life.
Reflective and Creative Thinker
 Generates ideas, designs, systems or information with resourcefulness to meet current and
emerging needs of society
 Responds to multiple experiences and ideas about the world and communicates personal
and Christian principles through various modes and media
Proficient Communicator
 Articulates ideas clearly for varied purposes and audiences of diverse culture
 Utilizes effectively appropriate media and information technologies composes and
comprehends a range written, spoken and visual texts to convey information that is
meaningful to society and the church.

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BA Core 11: Basic Microeconomics

COLLEGE OF BUSINESS ADMINISTRATION AND MANAGEMENT

VISION

The FCIC College of Business Administration and Management that offers

professional
Training to prepare the students to be globally competitive and Christ-centered, imbued with
Franciscan spirituality, morally upright, professionally competent and socially responsive.

MISSION
The FCIC College of Business Administration and Management commits itself to:
 Equip students with complete understanding and be academically competent
in the concepts, theories in Financial Management and Human Resource Development
Management;
 Prepare and assist students to seek employment by integrating and strengthening
the witnessing of the Gospel values in curricular and co-curricular programs
and activities;
 Establish collaboration to enhance linkages and partnership in and outside the
school community

PROGRAM DESCRIPTION
The FCIC Business Administration offers two majors: Financial Management
and Human Resource Development Management. It is a four year college program
recommended for people who plan to make a career in Banking and Finance and Industry.
The program aims to help students acquire analytical skills, perception, and competencies
necessary for sound financial decision making in the business world.

PROGRAM OBJECTIVES

1. Train and equip young men and women with the necessary knowledge, skills,
and attitudes to serve the community on the basis of the Catholic formation and
principles of social order and justice.

2. Equip the students with complete understanding of the concepts, principles and
the theories of Financial Management and Human Resource Development.

3. Assist students to seek employment and assume entry level jobs or positions
of responsibility as financial analyst, financial manager or executive

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BA Core 11: Basic Microeconomics

COLLEGE OF BUSINESS ADMINISTRATION AND MANAGEMENT

OBE COURSE OUTLINE

AY 2021 - 2022
Course Number : BA Core 11
Course Title : Basic Microeconomics
Learning Facilitator : Lolita M. Alba
Contact Hours : 3 hours/ week
Pre-requisite : General Economics
Course Description :

The course deals with the study of concepts, theories and principles in
economics as introductory part in the study of microeconomics. It shows graphically how
consumers behave and suppliers respond to changes in prices in different market structures.
As a concluding activity, the students will analyze case studies to enable them to experience
different behavior of demand and supply in a volatile business environment.

Course Outcomes

CO1 Understand the theories, principles and concepts in microeconomics;

C02 Explain and illustrate graphically consumers behavior and suppliers’ responses
to changes in prices in different market structures; and

C03 Analyze case studies

COURSE CONTENT

TIME
COURSE CONTENT/SUBJECT LEARNING OUTCOMES
FRAME
MATTER

Module 1. The Theory of Consumers At the end of module 1 delivery, the

FIRST Behavior learner is expected to;
QUARTER
L1 Types of Theories of Consumers
Identify and discuss the types of theories
Behavior, Utility Function
and how these influence the consumers
buying behavior; for maximum
satisfaction
L 2 Consumption Function and Discuss the concept of indifference curve
Indifference Curve and how it is used as a tool to analyze
consumption behavior on the utility
theory.
L 3 Budget Line and Optimum
Explain the relationship between the
Combination indifference curve which represents that
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First Semester -Module 1
BA Core 11: Basic Microeconomics
the consumer likes and the budget line
which limits affordability.
Module 2. The Theory of Production At the end of module 2 delivery, the
learner is expected
SECOND
L1 The Concept of the Theory of Explain the concept of production
QUARTER
Production function, explain the law of diminishing
returns and identify lessons from it.

L2 Isoquant and Isocost: Concept and Explain the concept, its properties and
Properties the relationship between the lines of
isoquant and isocost curve;

L3 Productivity and Relative Resource Identify and explain the basic ways to
Efficiency improve efficiency and the reasons for
return to scale and productivity
Review Exercises
Module 3. The Theory of Cost and Profit At the end of module 3 delivery, the
learner is expected to;
THIRD
L1 The theory of Cost: Definition and Explain the theory of cost; identify and
QUARTER
Concept define the different types of cost
Explain profit theory; explain the effect
L2 Profit Theory: Definition and Concept of profit in the increase or decrease of
demand and supply.
Problem Exercises
Module 4. Market Structures At the end of module 4 delivery, the
FOURTH learner is expected
QUARTER L1 – Market Structure Analysis Identify the classification of market
Pure Competition structures and analyze the pricing and
Monopoly output relationship under each market
structure.
Oligopoly
Course Requirements:
Attendance
Quizzes/ Performance Tasks
Quarterly Examinations
Major Learning Output
MIDTERM Problem Solving using graph

FINALS Case studies

References:

PAGOSO, DINIO & VILLASIS et al. INTROUCTORY MICROECONOMICS. 3rd Edition, Rex Bookstore,
2011
MARCELO, Danilo F.Jr. MICROECONOMICS: Theories and Applications. OBE Approach. ISBN: 978-
971-9654-35-3. Unlimited Books: Library Services and Publishing Inc., Intramuros Manila
h https://www.investopedia.com/terms/l/lawofdiminishingutility.asp
ttps://learn.saylor.org/course/ECON101
https://www.investopedia.com/ask/answers/040715/how-does-marginal-utility-relate-indifference-
curves-microeconomics.asp
empforum.neas-seminars.com/Topic6400.aspx

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First Semester -Module 1
BA Core 11: Basic Microeconomics
https://www.google.com/search?

q=optimum+combination+microeconomics&oq=optimum+combination+microeconomics&aqs=chro
me..69i57.19699j0

INTRODUCTION TO THE COURSE

Greetings to one and all.
Before that let’s recall that the study of economics deals with the choices and
decisions, we make to manage the scarce resources available to us. There are two branches of
economics. Macroeconomics which deals with the study on economic behaviour as a whole
while microeconomics deals with the study of individual behaviour of the consumer and
producers decisions, such as the choices individual consumers and companies make after
evaluating resources, costs, and trade-offs. When we talk about the economy, we refer to the
marketplace or economic system where our choices interact with one another.

This course will provide you with a basic understanding of the principles of
microeconomics. We will discuss how and why we make economic decisions, and how our
choices affect the economy. Think about each of the following units as a building block,
where the concepts you learn will enable you to understand the material you discover in the
next unit. By the end of this course, you will have a strong grasp on the major issues micro
economists face, including: consumer and producer behavior, the nature of supply and
demand, the different kinds of markets and how they function, and the welfare outcomes of
consumers and producers. We also explore how these formal principles and concepts apply to
real-world issues. The scope and emphasis of this course goes beyond a general understanding
of microeconomics to incorporate the core concepts of the overall field of economics.

MODULE 1 – The Theory of Consumers Behavior

Sub-topics of Module 1
L1 Types of Theories of Consumers Behavior

LO1 Identify and discuss the types of theories and how these influence the consumers
buying behaviour for maximum satisfaction; or total utility

;
L 2 Consumption Function and Indifference Curve

LO2 Discuss the concept of indifference curve and how it is used as a tool to analyze

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BA Core 11: Basic Microeconomics
consumption behavior on the concept of utility theory.

L 3 Budget Line and Optimum Combination

LO3 Explain the relationship between the indifference curve which represents that the
consumer likes and the budget line which limits affordability

Name: __________________________ Course/Year: _______________ Date: __________

PRE-TEST
Why? Pre-test is an assessment tool used to determine your proficiency in the
lessons that we are going to tackle. This will give you an idea of what to expect from
a new course content. This
might be your first time to be exposed to terms, concepts and ideas but just relax. Results
of your pretest will give us idea what to include, delete or improve in our module outline.
Giving your pretest will make you feel comfortable once the material is given and more
relaxing when post- test comes around. Take note of the results of your pretest.

Instructions:
Enumerate the answers to the following questions.
1. Write the three (3) model of factors that influence behavior
a. ________________________________________________
b. ________________________________________________
c. ________________________________________________
d. ________________________________________________

2. Write the quantitative definition of utility function

3. Identification
_________________1. Term in economics for satisfaction.
_________________2. Formula for marginal utility.
_________________3. What MU stands for.
_________________4. It is the basis of consumption and demand behaviour.
_________________5. It is the function of the units of consumption.

Thank you for completing the pre-test. Let us now proceed to discussion of
Lesson 1

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BA Core 11: Basic Microeconomics
The result of your recall exercise, whatever it may be, indicates the efficiency of your
retention ability, how you value the effort of your parents, friends, your facilitators and your
school that embrace you as a student. We will go back to this later.

You might want to ponder on this questions:

1. How does the insights gained from my studies develop my ability to become what
I should be in the future?

LESSON 1 - Types of Theories of Consumers Behavior

We expect you this

after end of Lesson 1 - LO1 Identify and discuss the types of theories and how these influence
the consumers buying behaviour for maximum satisfaction on the
concept of total utility

INTRODUCTION

Human desires are never ending whether it is a need or a want, especially now, we
are facing this COVID 19 pandemic, our normal lives are heavily affected. This new normal
conditions has change 360 degrees in our lives. From face to face to virtual learning, this is
the new modality of learning we are going to embrace because of desires to continue our
education. It is our choice to continue our study, because we consider education as a need.

This leads us to the heart of our discussion, the theory of consumer behaviour.
Theory of consumer behaviour constitute the demand side of the equation,

THEORY OF CONSUMERS BEHAVIOR

Marketing in the 21st century is part art and part science, and both sides place a
crucial role in successful marketing. Creative expression develops marketing campaigns that
catch the eye and capture the imagination, but behind every marketing strategy are theories
grounded solidly in psychology, economics, and studies in human behavior. The scientific
insights help marketers design campaigns that speak to the fundamental concerns and desires
of their audience, greatly deepening the impact of the marketing materials.

At the heart of the scientific study of marketing are key insights about consumer
behavior, or why consumers buy and act the way they do. Theories of consumer behavior
address important issues, such as how consumers purchase as individuals versus how they
purchase in groups, the role of emotions in purchasing decisions, post-purchase attitudes, and
the role of object utility. Understanding these issues enhances a marketing campaign’s
effectiveness and its impact on consumers.

To determine consumer behavior, marketers use numerous consumer behavior models.

The Theory of Reasoned Action

(Martin Fishbein and Icek Ajzen 1960)

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BA Core 11: Basic Microeconomics
The theory centers its analysis on the importance of pre-existing attitudes in the
decision-making process. The core of the theory posits that consumer acts on
behaviorbased on their intention to create or receive a particular outcome. In this
analysis, consumers are rational actors who choose to act in their best interests.
According to the theory, specially is critical in the decision making process. A consumer
only takes a specific action when there is an equally specific result expected. From the
consumer decides to act to the time the action is completed, the consumer retains the
ability to change his or her mind and decide on a different course of action.

EKB Model
(Engel, Kollet & Blackwell)

The EKB Model expands the Theory of Reasoned Action, and lays out a five-step
process that consumers used when making a purchase. The 1st step, input, is where
consumers absorb most of the marketing materials they see on television, newspapers or
online. Once the consumers collects the data, he or she moves into information processing,
where the consumer compares the input to past experiences and expectations.

Under the EKB Model, marketers have two periods where their input is the most
valuable. During the initial information stage, marketers must provide consumers with enough
information about the product to drive the consumer to keep the company’s products under
consideration for purchase. Lifestyle brands are very good at instilling a desire in the
consumer to look or feel a certain way with the product, even if the brand’s product is not
fundamentally different from competition

Motivational Need theory

(A. Maslow, 1943)

Under this theory, people act to fulfil their needs based on a five-part priority
system. The needs include, in order of importance: psychological (survival), safety, love,
esteem, and self-actualization. Marketers have been able to use motivational need theory very
effectively by creating an artificial need of consumers. Modern luxury carmakers are
especially good at highlighting the safety and security features of their vehicles over
aesthetics mind, they need to spend the money on an expensive luxury car because it is the
only way they can provide adequate safety features for their family.

Hawkins Stern Impulse Buying

(Hawkin Stern)

While many of the theories of consumers behaviour focus on rational action,

Hawkins Stern believed heavily in the idea of impulse behavior. Stern argued that sudden
buying impulses fit alongside rational purchasing decision to paint a complete picture of the
average consumer. Impulse purchases are driven largely by external stimuli and have almost
no relationship to traditional decision making.

Utility and Consumers Behavioral Factors

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BA Core 11: Basic Microeconomics
So that you can easily understand the subsequent topics, it is important that you
know first the following terminologies.

Utility - the economic term for the word “satisfaction”. It is the ability of a good to satisfy a
human want; it refers to the satisfaction or benefit obtained by a consumer from
whatever goods and services they consume.

Total Utility (TU) – refers to the entire amount of satisfaction a consumer received at various
level of consumption. The more of an item a consumers per unit of time, the
greater
will be his/her total utility of satisfaction from it, but only up to a certain level
(read
DMU).

Marginal Utility (MU) – is defined as a change in the total utility resulting from a one unit
change in consumption per unit of time, i.e, the marginal utility of consuming one
more unit of commodity X is equal to the change in TU per unit change in the
amount of X used, thus MU = TU / X

Principle of Diminishing Marginal Utility (DMU) – states that the more you have of anything,
the less important to you is any one unit of it.

Law of Diminishing Utility – states that the desirability of a given commodity tends to
diminish
as additional unit is acquired.

Objectives – a rational consumer always aims to maximize his satisfaction or utility. The
consumers’ preferences are described by their utility curves for the various goods
and services that confront them. The choice problem is to select from these the
kinds and amounts that will yield the greatest possible total of utility.

Constraints – the consumer is constrained by his income (the amount of money that he has to
spend per unit of time) and the prices of the goods and services available to him.
Typically his income per unit of time is more or less a fixed amount. Because of
this limitations, the consumer tackles with the problem of choice.

Utility is defined as the satisfaction derived from the consumption of a commodity

which determines consumption and demand behaviour. As such it is the foundation of
consumer’s behaviour. For a more clear understanding please study the “Just a Glimpse” in
lesson 2.

Cultural Social Personal Psychological

Culture Ref. groups Age &life cycle stage Motivation

Sub-culture Family Occupation Perception
Social class Roles & statuses Economic Circumstances Learning BUYER
Lifestyle Beliefs and
Attitudes

Figure 1. Model of Factors Influencing Behavior

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BA Core 11: Basic Microeconomics
Figure 1 represents the underlying cultural, social, personal and psychological factors
that affect utility and consumption behaviour. Inter factor combinations filter different
patterns of consumption behaviour down the line (see arrow).

The four (4) model of factors that influence consumers behaviour are the following:
Cultural factors
Culture is one of the most fundamental determinants of a person’s wants and
behaviors. While lower creatures are largely governed by instinct; human behaviour is largely
learned. The child growing up in society learns a basic set of values, perceptions, preferences
and behaviors through a process of socialization involving the family and other key
institutions
Social Factors
A consumer’s behavior is also influenced by social factors such as the consumers
preference groups, family, and social roles and statuses. Reference groups are those groups
that have a direct or indirect influence on the person’s attitudes or behaviors. A teenager buys
shoes that in accordance to the taste of his peer group while a more matured person would
prefer more durable or conservative shoes.
Personal Factors
A buyer’s decision are also influenced by personal outward characteristics such as: the
buyer’s age and life cycle, occupation, economic circumstances, lifestyle, personality, and
self-concept.
People change the goods and services they buy over their lifetimes. Young single
people have different consumption needs from retirees; newly married couples buy different
kinds of furniture from older married couples.
A person’s personality and self-concept will influence his or her buying behaviour.
Psychological Factors
A person’s purchases are also influenced by psychological factors: motivation,
perception, learning and beliefs and attitudes. In Maslow’s Theory of Motivation, sought to
explain why people are driven by particular needs at particular times. For example, a starving
man will not take an interest in going to a disco, nor in breathing clean air. However, as each
important need is satisfied, the next most important need will come into play. A belief is a
descriptive though that a person hold about something; while an attitude describes a person’s
enduring favourable and unfavourable cognitive evaluations, emotional feelings, and action
tendencies towards some object or ideas.
To sum up, a consumer will buy a particular product, given an optimum budget if he
or she thinks and believes that this product will give him or her the best value or utility.
The Utility Function

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BA Core 11: Basic Microeconomics
Utility is the technical term for satisfaction. There is a functional relationship between
utility and consumption as the need for the latter arises.
The functional relationship assumes two (2) forms and is quantitatively defined as
follows:
TU (Total Utility) = Function of Q
(consumption)
MU = Δ(TU) (satisfaction from additional
Δ(Q) unit of consumption)

Where Δ is change

The symbol for change (MU) carries a positive sign when the variable
increases and a negative sign if the variable decreases. As the consumption level increases, a
positive marginal utility (MU) increases total utility (TU) while the opposite is true when MU
is negative. Moreover, marginal utility is also defined as the utility or dissatisfaction from
the last unit of consumption, depending on whether MU carries a positive or negative sign.

In conclusion, the diminishing marginal utility (MU) causes the total utility (TU) to
decline eventually, for which reason maximum consumption is only up to the point of
maximum utility.

Question to Ponder: How does the behaviour of marginal utility curve (MU) influence the
behaviour of total utility (TU) curve and the level of maximum satisfaction?

Introductory Microeconomics (p. 70-74),

If you want more readings, read the references listed in your course outline, at the library.

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BA Core 11: Basic Microeconomics

Activity 1
The activity below will test your understanding on the subject matter.
Instruction: Supply the missing values under column 3. The 1st line is given as an example.
Table 10 (Utility schedule)
Consumption (Q) Total Utility (TU) Marginal Utility (MU)
1 7 7
2 14
3 18
4 22
5 25
6 27
7 28
8 28
9 27
10 25
11 22
12 18
13 13
14 7
15 0

The Water-Diamond Paradox

“I don’t know if it’s confusing everyone, but did it ever puzzle us why water, which is
more useful than diamonds has cheaper price?”
This paradox was explained by means of understanding of marginal utility and total
utility. Household are willing to pay a higher price for goods with greater marginal utility.As
we all know, there is an ample amount of water than diamonds. As such, water which is
plentiful has enormous total utility, but a low price because of low marginal utility.
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BA Core 11: Basic Microeconomics
Diamonds, however, have less total utility puzzling they are less plentiful, but a high price
because of a high marginal utility.
Personal judgements can show diamonds are more costly than water because people
subjectively value them more highly. However, it still cannot explain why diamonds should
be valued more highly than an essential goo such as water. In other words, consumers are not
choosing between all of the diamonds in the world versus all of the water in the world.
Undoubtedly, water is more valuable. They are choosing between one additional diamonds
versus one additional unit of water. This principle is known as marginal utility.
Consumer Surplus
Consumer surplus is an economic measure of consumer satisfaction or utility. It is
calculated by analysing the difference between the consumers pay for a good and how much
he is willing to pay for that.
Consumers always like to feel like they are getting a good deal on the goods and
services they buy and consumer surplus is simply an economic measure of this satisfaction.
Consider this example: the chocolate bar cost P70 but then you are willing to pay for P75.
Thus, as you purchase that chocolate bar, you gain P5, this is consumer surplus.
Since the consumer surplus is the difference between what consumers pay for a good
and how much he is willing to pay for that, the consumer surplus would be illustrated in the
left of the demand curve and above the specific price line.
To summarize, utility is the total satisfaction received from consuming a good or
service. This is essential as such it is the goal of economics – satisfying consumer wants
through efficient allocation of scarce resources. Thus, it is important to know how much we
satisfy them.
Utility maximization is a hypothesis explaining consumer behavior with consumer
demand theory and utility analysis. Economists assume the consumer is rational and will thus
maximize his or her total utility by purchasing a combination of different products rather than
more of one particular product. Thus a consumer would not stick on a single product
consuming the highest utility he might have. This matter could be accompanied and explained
through another concept: water-diamond paradox.

Opps! Do not say it’s difficult……………………… pm your facilitator…

Activity 2

Derived a utility curve using the table below. Use the MU data in Activity 3.
(Utility schedule)
Consumption (X) Total Utility (TU) Marginal Utility (MU)
(Y)
1 7 7 Requirement
2 14
Mark in the graph, the
3 18
(consumption where total
4 22
utility (TU) is at the
maximum) 15

Describe the movement of

MU
First Semester -Module 1
BA Core 11: Basic Microeconomics
5 25
6 27
7 28
8 28
9 27
10 25
11 22
12 18
13 13
14 7
15 0

Module 1 identify several theories of consumers behaviour. Compare and contrast the
postulates or the posits of each theory. Based on your experience which of these theories
that is a near representative of consumers buying behavior

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First Semester -Module 1
BA Core 11: Basic Microeconomics

Your answer will be graded based on the rubrics below:

Criteria Points Your Points

Comprehension 15
Substance/content 15
Total 30

Below is an exercise to enhance your creativity.

Write a narrative of your experience that tells your buying behaviour.

Who are you when it comes to choices of buying for need or want.

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First Semester -Module 1
BA Core 11: Basic Microeconomics

Your answer will be graded based on the rubrics below:

Criteria Points Your
Points
Comprehension 10
Substance/content 05
Total 15

1. How does the insights gained from my studies develop my ability to become what
I should be in the future?

Lesson 2
Consumption Function and
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Indifference Curve
First Semester -Module 1
BA Core 11: Basic Microeconomics

LESSON 2 Consumption Function and Indifference Curve

We expect you this
after end of Lesson 2 - LO2 Discuss the concept of indifference curve and how it is used
as a tool to analyze consumption behavior on the utility theory

Consumption patterns of an individual changes both for macro and micro reasons.
For micro reasons, changes are attributable to alteration of taste and preferences of an
individual also because of the influence of the fluidity of the environment. Take for example
this of COVID 19, our consumption preferences drastically changes. Businesses suffer
liquidity problems. Cost cutting to stay afloat were just a few of the many strategies that were
though of to sustain business.

Lesson 2 is the focused on the discussion of indifference curve together with isocost
concept.

The Indifference Curve

The indifference curve contains varying combination in the consumption of

commodities that yield the same level of total utility. An indifference curve illustrates this
property assuming two commodity items which is shown in Table 2. Assuming between food
and clothing as our example.

The points along the indifference curve correspond to the different combinations of
consumption of food and clothing that yield the same level of their aggregate utility. Between
any point to another along the curve, an inverse relationship exist between the commodity
unit inasmuch as the utility foregone by consuming less of one is regained by consuming
more of the other. It is the equality between utility gained and utility foregone that holds the
total utility level from both commodity items constant.

Between any two points along the indifference curve, the ratio between utility
gained and utility foregone is always equal to 1 and, therefore, constant. However, this is not
true of the corresponding substitution between the commodity items. The marginal rate of
substitution (MRS) of food (Y-axis) to clothing (X-axis) in Table 11 is measured as follows
which is simply how much food one has to give up to consume an additional unite of clothing.
MRS Food Consumption
Clothing consumption
Where:
= change

Assume a continuous increase in clothing consumption and, therefore, a decrease in

food consumption. Util decreases while its marginal
The marginal utility (MU) of clothing Consumptiom consumption or reciprocal

Consumption
Util increases due to the Law of Diminishing Returns. On the other hand,
, the marginal utility (MU) of food hand, the marginal utility (MU) of food
consumption increases while the reciprocal decreases due to the opposite influence of this law
as consumption declines. Therefore, for every utility foregone and then regained by
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First Semester -Module 1
BA Core 11: Basic Microeconomics
continuously decreasing food consumption and increasing clothing consumption, respectively,
the following relationship should hold true:
Positive ( clothing consumption is increasing)
Negative ( food consumption is decreasing)
Therefore:
( Food )
(MRS) = ( Clothing ) (decreasing)

Table 2. Illustrate the foregoing relationship through the slope of the indifference curve. The
change in food consumption diminished for every additional unit of clothing consumed

The Law of Diminishing Marginal Utility and the Shape of the Curve

Technically, the shape of the indifference curve is convex to the graph’s point of origin
due to the Law of Diminishing Returns. To maintain overall satisfaction, one only has to give
up less of a good with an increasing marginal utility (MU) to be regained by more
consumption of another with a decreasing MU. But practically put, one becomes increasingly
reluctant to give up a good (food for example) that becomes scarcer and additionally more
valuable (higher marginal utility or MU), in exchange for another (clothing) that becomes
more abundant and additionally less satisfying. At the extreme, no one is willing to give up a
valuable good in exchange for a worthless one.

In practical terms, one is only willing to forego less and less of one good in
exchange for more and more of another as the former becomes relatively scarce and more
valuable and the latter relatively abundant and less valuable.

Source: Slideshare

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When applying the law of Marginal Rate Substitution, we are guided by the following:

Assumptions
 The consumer is logical and knowledgeable to consume every unit of goods.
 Goods are equal in size and shape.
 No time gap between consumption.
 No change in income, preference, taste, and fashion.
 Utility is cardinal.
 Marginal unit of money is constant.

Limitations
This law doesn’t apply to
 Dissimilar units.
 Unreasonable quantity.
 Unsuitable time period.
 Rare collections like coins, stamps etc.
 Change in taste and fashion of the consumer.
 Abnormal person.
 Changing the income of the consumer.
 Habitual goods.
 Durable and valuable goods.

Characteristics of Marginal Rate of Substitution (MRS)

1. MRS is diminishing. One can obtain it if the consumer is willing to give up less and less
unit of good Y for every additional unit of good X.
2. MRS is constant. One can obtain this if for one more unit of Y, only one unit of X is given
up. It is constant for perfect substitution.
3. MRS is increasing because a consumer substitutes a commodity X for the other commodity
Y at an increasing rate to maintain the same level of satisfaction. In this case, one can
obtain an increasing marginal rate of substitution.

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Table 2. Indifference Schedule

Rice Consumption food Consumption Marginal Rate of Substitution
(MRS)
56 1 -
46 2 (10)
37 3 (9)
29 4 (8)
22 5 (7)
16 6 (6)
11 7 (5)
8 8 (4)
5 9 (3)
3 10 (2)
2 11 (1)

Hierarchy of Indifference Curves

As already mentioned, an indifference curve corresponds to a certain level of utility.

Therefore, changing the consumption levels of commodities at every point of combination
along the curve leads to another indifference curve and utility level. There is a hierarchy
consisting of infinite indifference curves as there are infinite levels of utility.

In Figure 2. All points from curve I1 rise to curve I2 as the consumption levels of
food and clothing increase; and the opposite is true with a downward shift in the curve. The
shift in the indifference curve follows the direction of the upward sloping line from the point
of origin of the graph indicating the consistency of varying the quantity levels of both
commodity items for all the points of combination along the curve. Hence no curve intersects
another. Moreover, an indifference curve can be drawn from any point on the graph as there
are infinite levels of utility.

Line of proportion

L4

Food
L3

L2

L1

clothing
Figure 2.

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Constructing an Indifference Curve

Indifference curves are plotted on a graph according to a system of equations, and

according to Investopedia, "Standard indifference curve analysis operates on a simple two-
dimensional graph. One kind of economic good is placed on each axis. Indifference curves are
drawn based on the consumer's presumed indifference. If more resources become available, or
if the consumer's income rises, higher indifference curves are possible – or curves that are
farther away from the origin."

That means that when constructing an indifference curve map, one must place one
good on the X-axis and one on the Y-axis, with the curve representing indifference for the
consumer wherein any points that fall above this curve would be optimal while those below
would be inferior and the entire graph exists within the confines of the consumer's ability
(income) to purchase those goods.

In order to construct these, one must simply input a set of data — for instance, a
consumer's satisfaction with getting x-number of toy cars and x-number of toy soldiers while
shopping — across this moving graph, determining the points by what is available for
purchase given the consumer's income.

Isocost

In economics an isocost line shows all combinations of inputs which cost the same
total amount. Although similar to the budget constraint in consumer theory, the use of
the isocost line pertains to cost-minimization in production, as opposed to utility-
maximization.

A isocost curve showing the combinations of factor inputs that have constant market
cost. If firms are acting as price-takers in factor markets, the isocost curve is a straight line,
whose slope represents the relative prices of different factors' services.

Isocost curve is a producer's budget line while isoquant is his indifference curve.

Isoquant indicates various combinations of two factors of production which give the same
level of output per unit of time.

An isoquant is analogous to an indifference curve in more than one way. In it, two
factors (capital and labour) replace two commodities of consumption. An
isoquant shows equal level of product while an indifference curve shows equal level of
satisfaction at all points (wikieeducator.org)

Just a Glimpse

Moreover, on ordinal and marginal utility, after the subjectivist revolution in the 19th
century, economists were able to deductively prove the importance of marginal utility and
highlight the law of diminishing marginal utility. For example, a consumer chooses product A
over product B because he expects to gain more utility from product A; economic utility
essentially means satisfaction or removal of discomfort. His second purchase necessarily
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BA Core 11: Basic Microeconomics
brings less expected utility than the first, otherwise he would have chosen them in reverse
order. Economists also say the consumer is not indifferent between A and B due to the fact he
ended up choosing one over the other.

This kind of ranking is ordinal, such as first, second, third, etc. It cannot be converted
into cardinal numbers such as 1.21, 3.75 or 5/8 because utility is subjective and not
technically measurable. This means mathematical formulas, being cardinal in nature, do not
apply cleanly to consumer theory. (Investopedia) pls. read…..

Activity 1
Indifference Curve Schedule
Rice Consumption food Consumption Marginal Rate of Substitution
(MRS)
56 1 -
46 2 (10)
37 3 (9)
29 4 (8)
22 5 (7)
16 6 (6)
11 7 (5)
8 8 (4)
5 9 (3)
3 10 (2)
2 11 (1)
Plot the above indifference curve schedule using a graph. Label your graph
correctly.

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Answer the following questions. You may search your answers in the ‘net but be sure
to include your comparisons or justifications of your ideas.

1. The term utility or satisfaction cannot be measured because the nature is subjective, so how
are these quantitatively measured to determine consumers satisfaction.(Microeconomics).
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________

2. Explain the meaning of indifference in the context of microeconomics. Explain the

concept
of indifference curve. What is indifference schedule. Draw illustrations of indifference
curve and another for indifference schedule.
________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Indifference Schedule

Indifference curve

Criteria Points
Substance/Content 15
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Originality 05
Total 20

Activity 2

For this part, assign a member from your family probably two. This is a test to
determine their level of maximum utility (satisfaction). Let them identify among the
following choices;

1. candy 3. Bread 5. Any of choice

2. water 4. Cold juice

The player should not take anything 1hour prior to the test. Best time to execute the test is 9 -
10 am or 3-4 pm. Note the quantity or glasses consumed. Write your observations what the
player did prior to the test that might affect his efficiency. Write the result of the test and your
assessment of the player. Does the principle of maximum satisfaction attained by the player?
Attached/paste a picture of the player doing the act. Please observe health protocols.

Your answer will be graded based on the rubrics below:

Criteria Points Your Points

Originality 10
Completeness of the process 10
Total 20

Name; _____________________Course/Year: ___________ Date: ________

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Activity 3

Below is an exercise to enhance creativity.

Write your experience of an instance where you made choices between situations. The
situations are both economically significant to you. Why you made that choice. What
principle in our discussion (indifference curve) does it apply? Relate your understanding to
this lesson.

Your answer will be graded based on the rubrics below:

Criteria Points Your
Points
Comprehension 10
Originality 10
Total 20

CONGRATULATIONS WE’RE DONE. IF YOU NEED, MY

ASSISTANCE, FEEL FREE TO TEXT, EMAIL, PM ME ANYTIME
_______________________________________________________

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Lesson 3
Budget Line and Optimum
Combination

LESSON 3 - Budget Line and Optimum Contribution

We expect you this
after end of Lesson 3 – LO3 Explain the relationship between the indifference curve which
represents that the consumer likes and the budget line which limits
affordability

INTRODUCTION

Every day we are faced with the dilemma of making our resources meet both ends.
Now that we are in economic crisis because of the effect COVID 19 pandemic, and will
likely to continue to affect household finances for years to come. Having a plan, prioritizing
spending, and using resources efficiently will be key to your financial stability.

Taking this lesson would help us understand the concept of budgeting, keep us tract
of our expenditures because it serves as a roadmap of our spending habits. Regardless of how
much money we have, we can always maximize the use of it. In the recent episode of
“Magbadyet Tayo” in Onenews Channel, a certain housewife was able to make her P100 to
P250 after 2 days, just after quarantine period by engaging into an on line business and set
aside the net profit to spend for household spending until now (July 6, 2020).

Budget Line

Studying demand side of the economic equation, we need to understand how

households make decision, economist’s look at what consumers can afford. To do this, we
must chart the consumer’s budget constraint. In a budget constraint, the quantity of one good
is measured on the horizontal axis and the quantity of the other good is measured on the
vertical axis. The budget constraint shows the various combinations of the two goods that the
consumer can afford.

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To better understand, let us define Budget line. It is a graphical representation of all
possible combinations of two goods which can be purchased with given income and prices,
such that the cost of each of these combinations is equal to the money income of the
consumer.

Budget line contains infinite points of combinations of the commodity items that the
same budget can buy at a given prices. The aforementioned statement is quantitatively
expressed as follows, assuming food and clothing as the commodities being purchased.

The formula in determining budget line is:

B = (Pf) (Qf) + (Pc) (Qc)

Max Qf = B/Pc maximum for F (food)

Max Qc = B/Pc maximum for C (clothing)

Where:

B = given budget
Qf = quantity of food
Qc = quantity of clothing

Thus, the budget (B) is the total expenditure per food (f) and clothing (c).

According to consumer theory, a budget line illustrates graphically the maximum

affordable quantities of any two goods a consumer will likely buy. A budget line shows all
the possible combinations of the two goods that a consumer can afford provided the prices
of the goods and the consumer’s income remain unchanged

A straight budget line depicts the constant slope of the budget line. The slope of

the budget line given by the ratio of the price of the two goods (- P1/ P2). Constant slope and
thereby, straight line is in accordance with the assumption that the prices of the two goods are
given. An increase in income causes the budget line to shift outward, parallel to the
original line (holding prices constant). Which means that a consumer can buy more of both
goods with more income.

Food

B1 B2 B3 B4
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Clothing

Figure 3. Hierarchy of Budget Lines

Figure 3 presents a hierarchy of budget items where a directly proportional

relationship, however, exist between the levels of the budget line and the overall purchase of
quantities of the commodity items. The point along every budget line that coincides with the
straight line drawn from the point of origin of the graph represents the same ratio of
combination between the commodity units as Table 2 illustrates. The difference between
these points lies in the purchase quantities of the budget lines. Thus, a bigger budget leads to
a greater purchasing power and a higher budget line.

Table 2. Hierarchy of Budget Schedules

Budget = P500 Budget = P1,000 Budget = P1,500
Food Clothing Food Clothing Food Clothing
10 0 20 0 40 0
8 1 16 2 32 4
*6 2 *12 4 *24 8
4 3 8 6 16 12
2 4 4 8 8 16
0 5 0 10 0 20

 Price of Food = P50

 Price of clothing P100
 Rate of Substitution of Food to Clothing = 2

Actually, the budget lines have two important properties. One property is the
constant rate of substitution between the commodity variables from any point to another along
the budget line. The marginal rate of substitution (MRS) assuming the examples given, is
measured in absolute terms (i.e. disregarding the negative sign) as follows

If the slope is negative, the consumers has given up some of one good to obtain
more the other goods. The slope of the budget line shows the relative price of one product in
terms of the other product.

Note: The percentage change in the budget is the same as the corresponding change in the
quantity of each commodity for the same combinations. For example, the ratio of
combination equal to 3(see figures with asterisk) yields 6 units of food and 2 units of clothing
when the budget is P500.00. They increase by 100% to 12 units and four (4) respectively,
when the budget likewise increases by 100% to P1000.

Again; MRS = food units purchased

Clothing units purchased

The ratio is simply how much of the food purchase one has to give up to buy an
additional unit of clothing. This additional unit entails an additional expenditure equal to its
price which is shifted from the expenditure for food. The consumption of food foregone is

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First Semester -Module 1
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shifting this amount to buy an additional unit of clothing is the alternative meaning of the said
rate of substitution and expressed as follows:

MRS = Price of clothing

Price of food

Since these prices are constant, the aforementioned ratio and, hence, the marginal
rate of substitution (MRS) between the commodities is likewise constant at any point of
combination along the budget line. In Table 2, the marginal rate of substitution of food to
clothing is equal to 2.

The other property exhibits the budget lines as parallel to one another in the
hierarchy. Any budget like, which corresponds to a budget level, exhibits the same marginal
rate of substitution (MRS) between the commodities so long as their prices and, hence, their
price ratios are constant. This constancy should, therefore, bring the budget lines as parallel to
one another in the hierarchy where their levels vary in direct proportion to the size of the
budget.

The Optimum Combination

The quantities of the commodities at any point along a budget line indicate
purchasing capacity. This point, together with the said purchase quantities coincides with that
of an indifference curve and hence, meets the latter’s budget requirement. Simply put, the
consumer can afford to have that much satisfaction.

Figure 4 shows the three of the infinite indifference curves that are strategically
within the purchasing power of the budget line. Indifference curve I2 is attainable at either
points of intersection (B and C) with the budget line as on any curve I3. On the other hand, I3
is attainable at the point where it is tangent to the budget line (point A). Furthermore, no
indifference curve about I3, is attainable with the same budget in the absence of any point of
coincidence.

The question now is “which of the points along the budget line corresponds to an
indifference curve that yields the maximum satisfaction?” The budget yields the maximum
level of satisfaction at the point where it is tangent (Point A) to indifference curve I3. This is
the highest indifference curve corresponding to the highest level of satisfaction that the
budget can afford.

product A B Figure 4. Optimum Combination

I3

C l2
I3

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The concept of optimum combination implies that a consumer can increase the
level of satisfaction, despite a fixed income, by altering the consumption mix. For example, a
consumer minimize their consumption of luxurious items in favour of the more basic ones
during an economic crises. This is inasmuch as the utility gained by consuming more of the
latter outweighs the former, thus, minimizing the decrease in real income and the level of
satisfaction. Furthermore, the aforementioned concept also help make correct social decision.
For example, a government project maybe better off instead in generating income and
employment among the lower income groups as it contributes to a better mix of social
benefits. This is in as much as every peso of income generates greater marginal satisfaction
among the lower income groups, thus increasing aggregate social welfare.

In addition, optimum factors combination or the least cost combination refers to

the combination of factors with which a firm can produce a specific quantity of output at the
lowest possible cost. Thus, the consumer's optimal combination of goods is at the point
where the budget line is tangent to an indifference curve or where the marginal rate of
substitution (MRS) is equal to the opportunity cost or relative price of the two goods, as
indicated by the slope of the budget constraint.

Consumer Welfare

The peso value that the consumer is willing to pay for certain volume of a
commodity is less than the peso value of the benefit from its consumption. This is also means
that the utility units foregone in paying for the commodity item are less than the utility units
gained from their consumption. The net benefit from the exchange is called consumer’s
surplus or additional purchasing power.

In Figure 5. The consumer is willing to pay P10 for 1 unit but P9 for 2 units of
commodity. But the market dictates that the consumer only pays P9 for 2 units as well as for
the earlier or 1st unit when consuming all of the 2 units of commodity. Therefore paying P9
instead of P10 for the earlier or first unit with 2 units of consumption creates a consumer
surplus of P1. This is simply the difference between the consumption gains of P10 for the 1st
unit and P9 for the 2nd unit and the sacrifice made from the purchase of the quantities equal to
P9 for each of the 1st and 2nd units.

(a)
Price
10
9 P1 surplus

1)

1 2 Quantity of demand

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First Semester -Module 1
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(b)
q

Figure 5. Consumer’s Surplus in

Price Surplus Monetary Units

p e

  quantity of demand
o i n D
Assuming quantity and price as divisible and infinitesimal, the consumer surplus at
n units of consumption in figure 5 is equal to the area of the shade portion (e-p-q) above the
Total Revenue (TR) area (n-0-q-e). This is the difference between the gains in consumption as
the total area under the curve represents and the sacrifice made from the purchase of the
quantities as the TR area represents. (Pagoso, 2011)

Summary

• A rational consumer would buy an additional unit of a good as long as the perceived
peso value of the utility of one additional unit of that good (say, its marginal
utility) is greater than its market price.
• The Two-Good Rule
MU MU price of good x
I H
-------- = ---------- price of good y
P P
x1 y1

 Alternative Approach to Consumers Theory

• Indifference curves
An indifference curve is a line drawn in a two-dimensional space showing different
combinations of two goods from which the consumer draws the same amount of utility
and therefore he/she is “indifferent” about.
• Budget lines
A budget line is a line drawn in a two-dimensional space representing a certain level of
income which the consumer can purchase various combinations of two goods at given
prices.

• The consumer's optimal combination of goods is at the point where the budget line is
tangent to an indifference curve or where the marginal rate of substitution (MRS) is equal
to the opportunity cost or relative price of the two goods, as indicated by the slope of the
budget constraint.

Properties of Indifference Curve

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First Semester -Module 1
BA Core 11: Basic Microeconomics
Indifference curves for two “goods” are generally negatively sloped
The slope of an indifference curve reflects the degree of substitutability of two goods for
one another
Indifference curves are generally convex, reflecting the principle of diminishing returns
Indifference curves never cross
Indifference curves that are farther from the origin represent higher levels of utility
Indifference curves for a “good” and a “bad” are positively sloped

Please read….

Activity 1

Answer the following questions These questions cover the entire module.

1. Define economics as perceived by these economists. 3 pts each. Write the source after
each definition.

Adam Smith: _______________________________________________________

___________________________________________________________________
__________________________________________________________________
___________________________________________________________________
___________________________________________________________________.
Ayred Marshall: ______________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
L. Robbins: __________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
Samuelsons: _________________________________________________________
____________________________________________________________________
____________________________________________________________________
____________________________________________________________________
Jacob Viner: __________________________________________________________
_____________________________________________________________________
_____________________________________________________________________
_____________________________________________________________________

2. Formulate your own definition of economics, capturing the thought of the above economist
and the reality of the 21st century. (15 pts guided by the rubrics below);
______________________________________________________________________

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 First Semester -Module 1
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______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________

Criteria Points Actual

Conciseness and 10
Substance
Originality 05
Total

ACTIVITY 2

1. Instructions: Fill up the table below and draw a combined graph.(15)

Quantity of Good X Consumed Total Utility(TUx) Marginal Utility (MUx)
0 0
1 4
2 7
3 9
4 10
5 10
6 8

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First Semester -Module 1
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2. Make your analysis and interpretation of the graph. What does the curve in the graph
signify. (10 pts)
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________
__________________________________________________________________________________________

Your answer will be graded based on the rubrics below:

Criteria Points Your
Points
Substance 10
Originality 10
Total 20

POST TEST

Instructions:
Enumerate the answers to the following questions.
1. Write the three (3) model of factors that influence behavior
a. ________________________________________________
b. ________________________________________________
c. ________________________________________________
d. ________________________________________________

2. Write the quantitative definition of utility function

3. Identification
_________________1. Term in economics for satisfaction.
_________________2. Formula for marginal utility.
_________________3. What MU stands for.
_________________4. It is the basis of consumption and demand behaviour.
_________________5. It is the function of the units of consumption.

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First Semester -Module 1
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CONGRATULATIONS WE’RE DONE. IF YOU NEED, MY

ASSISTANCE, FEEL FREE TO TEXT, EMAIL, PM ME ANYTIME
_______________________________________________________

We are done with Module 1 – Lesson 3

End of Module 1 for 1st Quarter, BA Core 11

Congratulations
We have completed module 1
First Quarter

37