Indifference

Indifference is when we have two good that we would be perfectly happy consuming in different combinations. We try to obtain the highest amount of the good without going into the unattainable. The relationship between the goods tells us which combination the consumer would be satisfied with. The indifference concept goes along with the way a consumer will substitute another good for the first good. This concept is called the marginal rate of substitution. This is the rate at which a person will give up one good to get more of the other wile staying on the same indifference curve.

On a graph, the consumer wants to attain the highest indifference curve. This curve is the one that only hits the budget line at one point. In attaining this curve, the consumer must maximize their budget and also find the perfect balance between the two goods. This point is where the marginal rate of substitution and relative price equal. The marginal rate of substitution tells you how many unit you are willing to give up to get the other good.

Maximize Utlitiy

Every person wants to maximize their whole benefit in consuming. When they buy a good they want the benefit to be the greatest it can possibly be. There are a few different way to get a maximized utility and benefit completely from buying goods. One way is to allocate the whole budget. First the consumer can choose to put money into savings and also make the appropriate payments but the money left over should be all spent on goods and services. If you spend all your money you are more likely to get the greatest amount of utility from consuming the most amounts of goods. The second way to maximize utility is to make sure that marginal utility is the same per dollar for all goods. Basically, if the consumer feels more benefit from one good over another they should consume more of that good rather than another. For example if the marginal utility of milk is 8 and the marginal utility of incense is 4, than the consumer should consumer more milk and less incense so they will completely maximize their utility.

This concept also goes along with the Paradox of Value. The Paradox of Value is the difference between total utility and marginal utility. Total utility tells us about value where marginal utility tells us about price. An example is water and diamonds. Water has a high total utility and a low marginal utility where diamonds has a low total utility and a high marginal utility.

Relative Price

Relative price is when changes in the relative price lead to changes in consumption choices. If a good that is valued by consumers suddenly has a lower cost then the consumers are likely to buy more of that good. In consuming more of that good, the consumer will have to cut other goods to balance out their budget and spending. The consumer sees that good as a higher utility and gets a greater benefit from consumer more of that good.
For example, if Publix is having a buy one get one sale of coca-cola consumers are more likely to buy coca-cola than any other soda brand. The price of each bottle of coke is lower than then normal price the consumer will buy more of it to reduce how much they have to pay in the future. Their budget will decrease but in the long run buying more of the sale soda is smarter because it will reduce the price they pay on soda overall.

The positive side

A positive externality is when a transaction is made between consumer and producer and a third party benefits. Education and vaccination are two major positive externalities because they both help to improve our standard of living, with either less disease or smarter people. Another example would be the development of internets and the computer industry.

This is a network externality where each additional user increases the value of the product for other existing users. An example would be MySpace. When MySpace first came out it was a new way to communicate with your friends. I’m sure in the beginning of MySpace there were very few people who used it or knew about it. Now there are millions of people on MySpace from all over the globe. With the new additions of people it became worth while to join the website because you could communicate with all kinds of people. This has become so popular now that most people have a MySpace or a Facebook.

Many network externalities give people a way of communicating or gaining knowledge. The base transaction is the people creating the product, MySpace, and the people buying the product, but in this case it benefits the society by giving them a way to meet and see people electronically. The same thing follows with the internet it is a way for people to get information at their fingertips.

Externality

An externality occurs when a transaction between a consumer and producer affects a third party. An example of this would be smoking. When a person buys a pack of cigarettes, they smoke them. In doing so, the smoke released from the person or the cigarette goes into the air. The people surrounding the person inhale the smoke and are affected. They are the third party that is affected by the transaction and don’t get any benefit just have to bear the consequences.

In this example, cigarette smoke releases toxins into the air and those toxins are inhaled by others around them. As many of you know, second hand smoke is a major concern for non-smokers. That is why they have made many places non-smoking environments, such as work areas and other public areas. Even here at St. Petersburg College, they have designated smoking areas.

The government has instilled laws that smoking should be prohibited in areas so the externality can be semi-resolved. I think this is one instance where the government made the right choice in making smoking illegal in many common areas so that people who smoke are not affecting people who don’t.

A price floor is a restriction imposed by the government that prohibits the price of a good from falling below a certain level. The most common example of a price floor is the minimum wage but, the government also uses price floors to aid farmers in selling their goods. When the government establishes a price floor, it is usually because the people come to them and ask for help. Normally, the farmers ask for the price of their good to be raise above the equilibrium price.

If the price is set above equilibrium price, then the demand for the good decreases and less people buy the good. The farmers don’t reduce the amount of goods they are making but the public reduces the amount of goods they are buying. The result is a deadweight loss due to overproduction. This overproduction is kind of a result of the government issuing a price floor so to reduce the loss they often buy a portion.

When a price floor is set and the result is the government paying for the unused goods, I my opinion it is a waste of resources. I understand that many farmers are being underpaid for their goods, such as the farmers going on strike a Publix, but the companies buying the goods should have the pay the difference.

Price Gouging

Price gouging, in my opinion, is unfair and unreasonable. For example, a hurricane to hits Pinellas County. All of the water, electricity, and housing are damaged or turned off. The only supplies that people have are ones they stocked up on. A company selling water, food, blankets, etc. comes into town. This company decides to make a gallon of water six dollars, blanket twenty dollars, and a loaf of bread eight dollars. The company feels that this is reasonable.

So along with the high prices, they give you an explanation. This explanation is that the risk of coming to such a desperate region is included in the price of the goods. This explanation, to the people, would seem like a cope out because it is. They would see their situation as a time of giving, not profiting. It is hard to see where the company is coming from when they raise the prices of all the goods they are supplying.

With this supply, they should see that they people have nothing. There houses have been waterlogged and their belongs swept out with the water. They don’t have the kind of money to buy the things they need to survive this disaster. Price gouging allows the company to profit off of desperate people that need the supplies to live. All in all, price gouging allows company to have an unfair advantage and profit off the distressed.