Basic Microeconomics Concepts 3
Consumer Choice | Taxation | Utility Maximization Rule |
Continues from “Basic Microeconomics Concepts 2”
Surplus is one method that measures the effectiveness of markets. It measures consumers’ or producers’ happiness regards to the price of products. Most consumers prefer to buy a product at a reasonable price. What I mean by “the reasonable price” that most consumers would choose paying a fair price for a product, neither the cheapest nor the most expensive. Therefore, consumers set their own budget constraints when buying goods. If a buyer’s willingness to pay is greater than the price of goods, the budget left and buyer’s happiness shows a Consumer Surplus.
Similar to consumers, producers willing to sell products at fair price, and you can think of this price as a market price. If the market price is greater than producers’ ideal price, then Producer Surplus exists.
A price ceiling and a price floor are one of the ways of controlling the price of goods. Governments issues these methods to keep the price between its minimums to the maximum. The reason why the government uses these methods is for managing the cost of scarce resources.
Although these methods designed to make a fair economy, these methods caused one drawback called a Deadweight Loss. The Deadweight Loss is a loss of total surplus when a market fails to form a competitive equilibrium. The reason why it is called Deadweight Loss is that no one benefits from those.
In the figure above, C and E portions of the graph are the deadweight loss.
Taxation is one of the factors that decide the surplus. Either consumers or producers are responsible for paying taxes. Also, the amount of taxes they should pay depends on whether consumers or producers are prices elastic or inelastic. If consumers or producers do not care highly about the price, they would need to pay more taxes.
“In Macroeconomics, you can learn more about Tariffs and Quotas”
Utility Maximization Rule is to make consumers make the best decisions out of options. One of the methods for this maximization rule is called “satisfaction points,” which mainly consider the most happiness per dollar spent on products.
MUx / Px = MUy = Py
Marginal Utility of Good X divided by the Price of Good X is equal to the Marginal Utility of Good Y divided by the Price of Good Y
This formula can be applied to real-life when you have two options with different prices and utility. And, if the utility formula equals out, you have the best combination.
