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Concepts Essay

Consumer Equilibrium

As per the consumer equilibrium, the consumers often have to make concurrent choices on how to mix goods/services demand with the given budget of the number of goods along with the services to consume. Further, to understand the consumer equilibrium, it is important to understand how one can maximize total utility. When relating and estimating the maximizing total utility, often the important step is to face the budgeting issue or the undefined constraints, such as depending on the consumer's income and the prices how to relate with the goods and the services, can help to determine the customer desire to consume (Chen, 2017). Due to the consumer's effort and the ability to maximize the total utility, in relation to the constraints, often the consumer's problem can be deemed as a problem. To dignify the solution to the problem, the consumer has to take concrete steps to decide and anticipate the choices based on the goods and services, which is called the consumer equilibrium.

To further determine and evaluate the consumer equilibrium, it is important to understand the concrete evidence as to how a consumer would be able to make chokes in between the two goods such as the good 1 and good 2 (Gavazza, 2018). Depending on the consumer's ability to decide and understand the pricing relation, it is important to judge the estimated prices such as goods 1 and 2 and having a fixed income or budget which would be related to the purchasing quantities of goods 1 and 2. Further, the consumer can purchase the quantities of goods 1 and 2 depending on their budget and the preferences as per the choices and the purchases (Li, 2018). It would be counted as the quantities that can be purchased and related to the good with the condition for consumer equilibrium, such as

image shows calculation of marginal utility of good by price of good

Source (Liberman, 2018)

The marginal utility per dollar can be estimated for the good 1 which needs to be equal to the marginal utility per dollar that can be spent over the good 2. Such as if the marginal utility per dollar that has been spent over the good 1 is estimated to be higher than the marginal utility per dollar that can be spent over the good 2, then it would help to interpret the choices and how the consumer can have the power to purchase more than good 1, in comparison to the good 2. The sense derived for the consumer is estimated as the purchase of the good 1 in comparison to the purchasing more of the good 2 (Ming, 2019).

Subsequently, after purchasing more and relating with the more of good 1, the valued marginal utility can be identified as the good 1 which would eventually fall due to the law of diminishing marginal utility, and how the marginal utility per dollar can be estimated on the good 1 that would be counted on the good 2. As determined how the amount purchased in relation to the goods 1 and 2 could still be limitless and depending on the choices, the marginal utilities per dollar can be counted as per the consumer's budget (Ming, 2019).

Producer Equilibrium

The producer’s equilibrium is defined as the optimization that can happen due to the support of maximizing the profit that have an optimal combination of factors (Wang, 2018). When the producer has to maximize the profit, depending on the choice of factors that the firms has to make, depends on the firms having two choices and having the optimal combination of factors (inputs).

1. The importance to minimize the impact of the costs and having a set of choices as per given output (Allevi, 2018)

2. To maximize the output with the given cost.

It is important to adopt the least-cost combination of factors and to anticipate how the firm can largely adopt the framework of the largest volume of output with relation to the cost and depending on the given level of output having a minimum cost. As identified how with the given choices it is important to denote the factors and how it would be combined in an optimum manner.

Cost-Minimization for a Given Output:

As per the theory of production, the producer's main motive is to understand the ways of the profit maximization firm, and how it would be estimated during the equilibrium stages. As the given cost-price function would be higher, it would be important to maximize the profits, and depending on the least cost combination factors, a choice can be made. Through the combination of output the main aim is to minimize the cost of production in relation to the given output. It would be a choice of the optimal combination for it (Aussel, 2017).

Assumptions:

Further, the analysis would be based on the following assumptions:

1. It would be related to the choice of two factors, labor, and capital.

2. It can be anticipated with the combined factors of labor and capital determined to be homogeneous.

3. As per the prices of units of labor (w) and having a proper capital (r) it would be given and to be constant.

4. Having a concrete relation to the cost outlay to be given.

5. The firm being able to produce the product.

6. Depending on the price of the product that has been given and to be constant.

7. The firm desires to be profit maximized.

8. Understanding the perfect competition within the factor market.

Explanation:

As per the given graph, the point of the least-cost estimated combination of factors that can be determined with the given level of output is denoted with the isoquant curve that is tangent to the is-cost line. As observed from the below graph, how the is-cost line GH is now tangent to the isoquant 200 at the point level of M.

Further to employ the combination and estimating the ОС of capital and OL of labor that can also produce the 200 units output with point M and having a given cost-outlay GH. As anticipated the firm with the purpose to minimize the cost that can produce the 200 units.

graph shows capital vs labour

Source (Aussel, 2017)

As understood from the above graph, how with the isoquant 200, on the point R or T, which is noted to be a higher is-cost line KP that can project the higher cost of production. From this graph, it has been noted how the is-cost line EF would show the lower cost but at the same time, the output 200 would not have attained it. Hence, the firm would adopt the minimum cost point M noted to be a least-cost factor combination that can produce the 200 units of output.

M would depict the optimal combination estimated by the firm. It is concluded to be a point of tangency that can be distinguished with the is-cost line tangent to the isoquant that can be a first-order condition that would not be necessary to the producer’s equilibrium.

Returns to Scale

As per the returns to scale it refers to the proportion of increasing total input with relation to the increase in output. It identifies the three kinds of returns to scale which are the constant returns to scale (CRS), having an increasing return to scale (IRS), along with the decreasing returns to scale (DRS) (Gavazza, 2018).

Increasing returns to the scale refers to the production variables when increased results in the more increase in percentage to the proportional increase in the output. For example in the below figure, when there is a 100% increase in the labor and capital, then it has resulted in the 200% increase in the output.

100% Labour + 100% Capital = 200% output

The constant returns to scale identify when the production variables would be increased by the same some percentage level of input and it would produce the constant level of the proportion increase in output. For example, when there has been a 100% increase in the labor and the capital, it has resulted in the same 100% level of the output (Liberman, 2018).

100% Labour + 100% Capital = 100% output

As per the decreasing returns to scale it is identified as the production variables that can be increased at the certain percentage levels, but still be a less-than-proportional increase in output. For example, when there has been 100% of the labor and the capital increase, it has resulted in a 100% lower output.

100% Labour + 100% Capital = (-) 100% output

In the company is a soap manufacturer which when doubles the total input then it is getting only a 60 present increase with the total output, then it would be called the decreasing returns to scale. Subsequently, if the manufacturer has doubled the output, with the same level of inputs, then it depicts then constant returns to scale. Lastly, when there is more increase in output in comparison to the proportion increase in production input then it is called the increasing returns to the scale (McKeown, 2018).

  • Depicting how with every input there would be a number, and it would result in the output that is multiplied by the, then the production function would be the constant returns to scale (CRTS). In this, the production function F would be identified as the constant returns to scale if, for any > 1,

F (z1, z2) = F (z1, z2) for all (z1, z2).

graph shows constant returns to scale

Source (Sueyoshi, 2017)

To identify the input by the number, how the factor increases would be lower then, as identified as the production function to have the decreasing returns to scale (DRTS). Identified as the F that can be decreasing returns to scale showing > 1 (Sueyoshi, 2017)

F (z1, z2) < F (z1, z2) for all (z1, z2)

graph shows decreasing returns to scale

Source (Sueyoshi, 2017)

When to multiply the amount to every input identified as the number, depicting the factor and how the output increases higher than the production function as identified as the increasing returns to scale (IRTS). As identified the production function F would be increasing returns to scale if, for any > 1 (Sueyoshi, 2017)

F (z1, z2) > F (z1, z2) for all (z1, z2).

graph shows increasing returns to scale

Source (Sueyoshi, 2017)

References

Allevi, E., Conejo, A. J., Oggioni, G., Riccardi, R., & Ruiz, C. (2018). Evaluating the strategic behavior of cement producers: An equilibrium problem with equilibrium constraints. European Journal of Operational Research, 264(2), 717-731.

Aussel, D., Bendotti, P., & Pištěk, M. (2017). Nash equilibrium in a pay-as-bid electricity market Part 2-best response of a producer. Optimization, 66(6), 1027-1053.

Chen, H. (2017). The Effect of Life Cost to Consumer Expenditure Behavior. International Management Review, 13(1), 85.

Gavazza, A., & Lanteri, A. (2018). Credit shocks and equilibrium dynamics in consumer durable goods markets. Economic Research Initiatives at Duke (ERID) Working Paper, 275.

Harvey, C. R., & Liu, Y. (2017). Decreasing returns to scale, fund flows, and performance. Duke I&E Research Paper, (2017-13).

Li, D., Nagurney, A., & Yu, M. (2018). Consumer learning of product quality with time delay: Insights from spatial price equilibrium models with differentiated products. Omega, 81, 150-168.

Liberman, A., Neilson, C., Opazo, L., & Zimmerman, S. (2018). The equilibrium effects of asymmetric information: Evidence from consumer credit markets. Working Paper. 45.

Ming, L., & Tunca, T. I. (2019). Consumer equilibrium, demand effects, and efficiency in group buying. Demand Effects, and Efficiency in Group Buying (March 13, 2019).

McKeown, R. (2017). Costs, size, and returns to scale among Canadian and US commercial banks (No. 1382). Queen's Economics Department Working Paper.

Sueyoshi, T., & Wang, D. (2017). Measuring scale efficiency and returns to scale on large commercial rooftop photovoltaic systems in California. Energy Economics, 65, 389-398.

Wang, X., Wang, L., & Zhang, S. (2018). Impacts of cooperation between the wind power producer and DR aggregator on electricity market equilibrium [J]. Power System Technology, 42(1), 110-116.

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Economics Assignment Help

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