Consumer and Producer Behaviour; Production and Costs
This section covers utility, consumer equilibrium, production in the short run and cost curves, which the exam tests through marginal analysis and cost calculations. You should be able to explain diminishing marginal utility and why marginal cost cuts average cost at its minimum.
Core rules
- Total utility rises as consumption increases; marginal utility (MU) is the extra utility from one more unit. The law of diminishing marginal utility says MU falls as consumption rises.
- A consumer maximises utility when MU per unit of money is equal across goods: MUx/Px = MUy/Py, subject to the budget.
- In the short run, at least one factor is fixed. Total product, marginal product and average product are linked. Marginal product may rise then fall; diminishing returns set in when marginal product falls.
- Costs: fixed costs do not vary with output; variable costs do. TC = TFC + TVC. AC = TC/Q. MC = change in TC ÷ change in Q.
- MC cuts AVC and AC at their minimum points. Fixed costs affect AC but not MC.
- Economies of scale lower long-run average cost; diseconomies raise it.
Worked example
A consumer has MUx = 20, Px = 4; MUy = 15, Py = 3. Then MUx/Px = 5 and MUy/Py = 5, so the consumer is in equilibrium. If instead MUx/Px = 10 and MUy/Py = 5, each kyat spent on X gives more utility, so the consumer should buy more X and less Y until the ratios equalise. For a firm, if TC rises from 300 to 320 when output rises from 10 to 11, MC = 20 ÷ 1 = 20.
Traps
Do not confuse marginal utility with total utility; do not treat accounting cost as economic cost; do not say MC is average cost; do not count fixed cost in marginal cost.