ACC-101: MANAGERIAL ECNOMICS

LESSON 5:
1ST SEMESTER | A.Y. 202Y – 202Y
LECTURER: SIR/MS.

Household Behavior and Consumer Choice — Oligopoly Competition

— Monopolistic Competition
Firms and Household Decisions

Perfect Knowledge

 We also assume that households and firms

possess all the information they need to make
market choices.
o Buyers know where the available goods
and services are
o Seller know the available resources and
inputs
 Perfect knowledge is the assumption that
households posses a knowledge of the qualities
and prices of everything available in the market,
and that firms have all available information
concerning wage rates, capital costs, and output
prices.
Perfect Competition o There is no perfect knowledge in
monopoly
 A key assumption in the study of household and
firm behavior is that all input and output markets
are perfectly competitive.
Household Choice in Output Markets
 Perfect competition is an industry structure in
which there are many firms, each small relative to Every household must make three basic decisions:
the industry, producing virtually identical (or
homogeneous) products and in which no firm is o How much of each product, or output, to demand.
large enough to have any control over price. o How much labor to supply.
o How much to spend today and how much to save
2 Types of Market Structure: for the future.
PERFECT COMPETITION

— There are many sellers Determinants of Household Demand

— Produce homogeneous/identical products sold
— Prices are almost the same in the market Factors that influence the quantity of a given good or
— One seller cannot change his price, whether service demanded by a single household include:
lower or higher, because others are selling at the
o The price of the product in question.
same price
o The income available to the household.
— In perfect competition, sellers are said to be
o The household’s amount of accumulated wealth.
“price takers”—they just follow the prevailing
o The prices of related products available to the
market price kasi napakadami nila
household.
— The sellers do not have control over the price
o The household’s tastes and preferences.
IMPERFECT COMPETITION o The household’s expectations about future income,
wealth, and prices.
— Monopoly Competition - one seller (no substitute
for that product)—you have complete control over
market, in which you can increase/decrease your The Budget Constraint
price anytime you want because people will still
buy to you no matter how high/low the price is
 The budget constraint refers to the limits imposed
on household choices by income, wealth, and product
prices.
 A choice set or opportunity set is the set of options
that is defined by a budget constraint.
 A budget constraint separates those combinations I PX
of goods and services that are available, given limited Y  X
income, from those that are not. The available PY PY
combinations make up the opportunity set.
 The Y-intercept of the budget line shows the
amount of good Y that can be purchased when all
Choice Set / Opportunity Set income is spent on good Y.
𝐼
𝑃 𝑌
o Anything outside the line is beyond your
budget
o You can be along the line or inside the line
but not outside the line
 The slope of the budget line equals the ratio of the
𝑃
goods’ prices. − 𝑃𝑋
𝑌

 The real cost of a good or service is its opportunity

cost, and opportunity cost is determined by relative
prices.
 It is important to study because this is what we
sacrifice

The Budget Constraint

 When a consumer’s income is allocated entirely

towards the purchase of only two goods, X and Y,
 This is the budget constraint when income equals
the consumer’s income equals: P200 dollars per month, the price of a jazz club visit

I  X . PX  Y . PY
is P10 each, and the price of a Thai meal is P20.
 One of the possible combinations is 5 Thai meals
and 10 Jazz club visits per month (POINT C)
where: I = consumer’s income

X = quantity of good X purchased

Y = quantity of good Y purchased

PX = price of good X

PY = price of good Y

 POINT E is unattainable, as it exceeds our budget

o You cannot have 5 Zumba class meeting
and 10 Thai meals at the same time (sobra
The Budget Line na sa 200)
 POINT D does not exhaust the entire income
available.

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 o Di mo nauubos lahat ng income mo kasi  Total utility increases at a decreasing rate, while
nasa loob ng line marginal utility decreases.
 Total Utility curve is an upward sloping curve
 Marginal Utility is a downward sloping curve
o As you go to the club more often, the marginal utility
goes down
 These 2 are related that thy correspond with each
other

Diminishing Marginal Utility and Downward-Sloping

Demand

 A decrease in the price of Thai meals shifts the budget

line outward along the horizontal axis.
o Pag bumaba price ng Thai meals, considering no
change in income, your budget line will shift—have
a bigger opportunity set
 The decrease in the price of one good expands the
consumer’s opportunity set.
 Diminishing marginal utility helps to explain why
demand slopes down.
The Basis of Choice: Utility o The marginal utility curve and the demand curve are
much similar
 Utility is the satisfaction, or reward, a product yields  Marginal utility falls with each additional unit
relative to its alternatives. The basis of choice. consumed, so people are not willing to pay as much.
o Hypothetical measure for utility is UTILS
 Marginal utility is the additional satisfaction gained
by the consumption or use of one more unit of
something. Income and Substitution Effects
o Marginal – extra/additional Price changes affect households in two ways:
o It is important to know the marginal utility that
you gained out of consuming a certain product (1) The Income Effect of a Price Change
 The Law of Diminishing Marginal Utility:
o The more of one good consumed in a given — Consumption changes because purchasing
period, the less satisfaction (utility) generated power changes.
by consuming each additional (marginal) unit of — When the price of a product falls, a consumer has
the same good. more purchasing power with the same amount of
income.
o “pagsasawa”
— When the price of a product rises, a consumer
has less purchasing power with the same amount
of income.
Total Utility and Marginal Utility of (2) The Substitution Effect of a Price Change
Trips to the Club Per Week
— Consumption changes because opportunity costs
TRIPS TO MARGINAL change.
CLUB TOTAL UTILITY UTLITY — When the price of a product falls, that product
0 0
1 12 12 becomes more attractive relative to potential
2 22 10 substitutes.
3 28 6 — When the price of a product rises, that product
4 32 4 becomes less attractive relative to potential
5 34 2
substitutes.
6 34 0

Income and Substitution Effects of a Price Change

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 Price of a good  The wage rate can be thought of as the price—or
or service
Household is Income Household the opportunity cost–of the benefits of either
better off effect buys more unpaid work or leisure.
FALLS Opportunity o Wage is the opportunity cost of not working
Substitution Household
cost of the or engaging in leisure activities
effect buys more
good falls o Sinasacrifice mong hindi sumahod kapag
Household is Income Household
worse off effect buys less
hindi ka nagtatrabaho
RISES Opportunity  The decision to enter the workforce involves a
Substitution Household trade-off between wages (and the goods and
cost of the
effect buys less
good rises services that wages will buy) on the one hand, and
leisure and the value of nonmarket production on
 Opportunity cost of the good falls – you are willing the other.
to give up less to be able purchase that good, then
household will buy more

The Diamond/Water Paradox The Labor Supply Curve

The diamond/water paradox states that:  The labor supply curve is a diagram that shows
the quantity of labor supplied at different wage
(1) the things with the greatest value in use frequently rates.
have little or no value in exchange  Its shape depends on how households react to
o WATER changes in the wage rate.
o Napakaraming value pero mas mura ang
value

(2) the things with the greatest value in exchange Income and Substitution: Effects of a Wage Change
frequently have little or no value in use.  An increase in the wage rate affects households in
o DIAMOND two ways, known as the substitution and income
o Glass cutter effects.
o Konti lang ang gamit pero napaka mahal
dahil konti lang ang supply (1) Substitution Effect
— The substitution effect of a higher wage means
that the opportunity cost of leisure is now higher.
Given the law of demand, the household will buy
less leisure.
o To work more
— When the substitution effect outweighs the
income effect, the labor supply curve slopes
Household Choice in Input Markets upward.
— As you supply labor, your wage continues to go
As in output markets, households face constrained up as you continue working
choices in input markets. They must decide: — Habang nagtatrabaho ka, tumataas sweldo
o Whether to work mo—you are giving up leisure activities because
o How much to work you want to work and earn more wage
o What kind of a job to work at

These decisions are affected by:

o The availability of jobs

o Market wage rates
o The skill possessed by the household

The Price of Leisure

(2) Income Effect

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 — The income effect of a higher wage means that
households can now afford to buy more leisure.
— When the income effect outweighs the
substitution effect, the result is a “backward-
bending” labor supply curve.

Supply Labor Curve

o Initially, the supply curve is an upward sloping

curve—as you work more, you earn more
o But there comes a point that supply curve bends
backwards—will stop working and engage with
leisure activities
o Even if you give me a high wage—I will only work at
that point.

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