Campbell McConnell and Stanley Brue on Economics - Essay Example

Chapter 7 According to the economic theory, consumer surplus is the difference between the price you are willing to pay for a commodity and the actual price for a product. For example, if you want to buy a computer, there must be some value that you will be prepared to pay, for example, like $550. However, once you go to a market, you find that a computer of your choice is available for only $500. The difference between what you were prepared to pay for this computer and what you’ve paid is your consumer surplus. In this case this consumer surplus is $50. The reason behind this is your price elasticity of demand or the value of purchase for you. For example, a product with really high elasticity will mean that you don’t value a product very much and hence it will have a low consumer surplus and vice versa. 2) Elasticity, simply, is the responsiveness of quantity demanded to a change in price. For example, when you levy a sales tax on any product its price increases. This price increase is going to decrease the quantity demanded of this product. The magnitude of change, however, will depend upon the elasticity of demand. For example, if sales-tax is levied on a product with inelastic demand, then quantity is not going to fall by a large amount and large revenue will be collected. On the other hand, if sales-tax is levied on a product with elastic demand, the change in price is going to decrease the quantity by a greater amount and revenue collected will be less. 3) I think that the government should charge those products with high price inelasticity of supply. This is because, if it levies taxes on products with high elasticity of supply, the suppliers would pressurize the government by supplying fewer amounts in the market and hence majority of consumers will be deprived of the product. So, it should charge a product with low price elasticity of demand so that supply does not change much and consumers get the adequate amount of product. 4) Simply, the perfectly inelastic demand and supply would ensure that imposition of tax is going to reduce the quantity in the market by smaller amounts and hence, this will result in little or no welfare loss. 5) In this case, consumer will bear a bigger burden of the tax because suppliers will easily pass it on consumer by supplying less, but consumers would encourage them to keep producing the same amount of cigarettes by paying a bigger share of tax. 6) The entire tax burden is going to be bore by the suppliers, because if they try to pass some of it on consumer then consumer will go without the product rather than paying their share of tax. 7) In this case when price is more inelastic for suppliers and less inelastic for consumer, then the suppliers of a product are going to bear a bigger share of taxes or they will contribute a bigger amount in the tax payment. In this case, the incidence of taxation will be, 70% by the suppliers and 30% by the consumers. 8) There’s no proper link between price elasticity of supply and revenue. However, since supply and revenue are directly proportional, as a result, the higher the supply, the bigger the revenue earned from taxes. As a result, those goods should be taxed which have inelastic supply because it is going to keep the supply high and going to earn bigger amounts of revenue for the government and vice versa. 9) Rent-Seeking Behavior occurs when firms or a group tries to confer the advantage by transferring costs of a particular action on the other competing group. This behavior maximizes the profit or rent for themselves at the cost of other. It may include policies, such as: lobbying, obtain special favor from authority etc. However, rent-seeking policies are only profitable, if the demand of individual for a product is price inelastic. This is going to ensure that any price that is transferred to this group is not going to decrease the quantity purchased and hence maximum amount of revenue is earned from it. 10) a) B) b) c) d) Chapter 8) 1) Marginal Utility is extra satisfaction provided by a consumption of little more or little less of a product. In other words, it is a change in total satisfaction brought about by a change in consumption. 2) Diminishing marginal utility is a law that states that states that as you keep on increasing your consumption, the extra satisfaction that you derive from each consecutive unit will less than the preceding unit. In other words, each extra unit is going to provide less satisfaction then the previous unit. The products that exhibit this kind of behavior are usually luxuries. For example, the purchase of your first car is going to give you the maximum satisfaction, but after that when you will buy a car, it will be less satisfying than the first purchase. Similarly, once a thing is a need it has a great utility, but if it becomes irrational purchase, the law of diminishing marginal utility sets in. 3) This can be due to the fact that most of their purchases are irrational purchases that yield very little marginal utility. For example, if a person buys first house, it is going to make him very happy, the second house will increase his happiness by a smaller amount and so on. Similarly, over the years, Americans might have been buying things not out of need but to utilize their income and as a result their happiness has not changed much since. 4) a) At the 3rd Can of Soda b) Sanjay will not consume the 7th Can of soda as it is going to take his utility to negative or as a result of consuming this can, he may experience negative feelings like vomiting etc. c) False. Consumption of two cans is going to be a rational behavior considering diminishing marginal utility. However, to maximize this total utility he will have to continue his consumption until MU becomes 0. This happens at the consumption of 6 cans and not 2 cans. Alternative Perspective 1) Although, such purchase might increase the total utility but it will be result in diminishing marginal utility. However, this might not be true, as utility is not usefulness but happiness and person might get happiness from impressing other. So, the idea that showing-off is going to reduce or increase the marginal utility is very subjective and changes from person to person. We cannot, therefore, say that showing-off or impressing other are not going to maximize the utility or set in diminishing marginal utility. 2) It is an established fact that advertising leads to irrational buying decisions that reduce the consumer’s ability to make right or useful purchases. But, as already said, that utility is not synonymous with usefulness, we can conclude that even making an irrational purchase influenced by advertising may increase our total utility. References 1) Campbell McConnell and Stanley Brue. Economics. McGraw-Hill Companies; 15th edition (October 15, 2001) 2) Richard Lipsey and Alec Chrystal. Oxford University Press; 10th Revised edition (28 Aug 2003) 3) John Sloman. Economics. Prentice Hall; 5 edition (19 Dec 2002) 4) Robin Pindyck and Daniel Rubinfield. Microeconomics. Prentice Hall; 7 edition (June 21, 2008) Read More