LECTURE 2.pptx Production and operation management
- 1. Lecture 2-3 Personal Budg t Managerial Economics 101 Lecture 2-3 Personal Budget
- 2. Introduction and Importance of Economics Branches of Economics Basic Terminologies of Economics
- 3. Utility of a Product or a Service and its Approaches Indifference Curves Law of Diminishing Marginal Utility
- 4. Scenario ▪ Amit has moved to a new city for his new job and he has no relatives or friends there. He decides to set up his new home in this new city. He has already selected a semi-furnished apartment and then he decides to have a large flat-screen TV and a comfortable couch in his living room for entertainment and relaxation.
- 5. Scenario ▪ Currently, he has no bed to sleep on so he needs to buy one. He wants to go shopping as he wants to decorate his home with artwork, plants, and stylish furniture to create an aesthetically pleasing environment that reflects his personal taste and enhances his enjoyment of the space. In the middle of his shopping expedition, he realizes that he also needs basic kitchen appliances such as a stove, a refrigerator, and utensils to cook and store food. After a month, he gets his paycheck and decides to purchase a high-quality, feature-rich smart TV that he can now afford. While browsing for items, he also wants to replace his current couch with a designer couch.
- 6. In this scenario, identify and bucket the needs, wants, and demands of Amit.
- 7. ? sion Where do you all spend your money?
- 8. Why do we buy any product? What are needs, wants, and demands?
- 9. Needs, Wants, and Demands Needs Definition: Basic requirements essential for human survival and well-being, such as food, water, air, and shelter. Examples: Access to clean water, nutritious food, safe housing. Types of Needs: Stated Needs: Explicitly expressed by customers (e.g., "I need a warm coat for winter"). Unstated Needs: Not explicitly mentioned but expected (e.g., "I need the coat to be comfortable"). Real Needs: The underlying or actual need (e.g., "I need protection from the cold"). Delight Needs: Unanticipated or surprise needs that, when fulfilled, exceed customer expectations (e.g., "The coat has an unexpected feature like heated pockets"). Secret Needs: Needs that customers are reluctant to express (e.g., "I want the coat to be from a high-end brand to impress others").
- 10. Wants Definition: Desires or wishes for products or services that are not essential for survival but can enhance comfort, enjoyment, or status. Examples: A designer jacket, a luxury car, a vacation in an exotic location. Relationship to Needs: While needs are necessary for survival, wants are about preferences or desires. For instance, you need food to survive, but you might want a gourmet meal from a fancy restaurant. Opposite of Needs? Not necessarily. Wants are more about the choices or preferences people make to satisfy their needs. For example, while everyone needs food, one person might want a salad, and another might want a steak. Both satisfy the need for food, but in different ways.
- 11. Demands Definition: When a want is backed by the ability and willingness to purchase, it becomes a demand. Examples: If someone wants a smartphone and has the financial resources to buy it, their want becomes a demand. Importance: Businesses focus on demands because they represent actual sales opportunities. Summary Needs are essential for survival. Wants are desires for specific items or experiences that can enhance life but aren't essential for survival. Demands occur when wants are coupled with the ability to purchase. Understanding the differences between needs, wants, and demands helps businesses tailor their products and marketing strategies to better meet customer expectations and drive sales
- 13. Let us learn about the utility of a product or a service.
- 14. What is the utility of a product or a service? Give an example to support your answer. Discussion
- 15. The term ‘utility’ refers to the satisfying power of a commodity as compared to its want.
- 16. ? What are the approaches to measure utility?
- 17. Approaches to Measure Utility 0 1 02 Cardinal Approach Ordinal Approach
- 18. Cardinal Approach The cardinal approach to consumer behavior assumes that utility, or satisfaction, can be measured numerically and compared between different individuals. For instance, a consumer might assign a numerical value to the pleasure they get from eating a slice of pizza, rating it as 8 out of 10. Economists use a unit called a "util" to quantify this satisfaction, allowing for a precise, quantitative assessment of how much enjoyment a particular product or service provides. Ordinal Approach The ordinal approach to consumer behavior, on the other hand, emphasizes the ranking or ordering of preferences without assigning specific numerical values to the level of satisfaction. It recognizes that while consumers can compare and rank their preferences, the exact intensity of satisfaction is not quantified. For example, a consumer might rank their preference for ice cream flavors as follows: chocolate > vanilla > strawberry. This approach focuses on the relative preference rather than the precise measurement of satisfaction.
- 19. How does the measure of utility help business decisions? If an individual determines that eating one bar of Dairy Milk chocolate provides six utils of satisfaction and one bar of 5 Star chocolate provides eight utils, they would know that eating 5 Star is more satisfying. For Cadbury, knowing that 5 Star chocolate delivers two additional utils of satisfaction could help them strategically price and produce 5 Star to maximize its appeal. But what if you experienced the same level of satisfaction from both Dairy Milk and 5 Star? In that case, you would feel indifferent between the two, as both provide a similar kind of satisfaction.
- 20. Utility of a Product or a Service and its Approaches Indifference Curves Law of Diminishing Marginal Utility
- 22. Indifference Curves An indifference curve is a graphical representation of products that gives a similar kind of satisfaction. They help us understand consumer preferences. Indifference Curves: Properties Indifference curves are constructed by plotting various combinations of goods on a graph. They are typically downward-sloping and convex to the origin. Higher indifference curves indicate higher levels of utility
- 24. The properties of Indifference Curves are: Downward Sloping: Indifference curves are downward sloping, indicating that as the quantity of one good increases, the quantity of the other good decreases (assuming all else remains constant). Convex to the Origin: Indifference curves are convex to the origin, reflecting the concept of diminishing marginal rate of substitution (DMRS), where the consumer is willing to give up fewer units of one good as they consume more of it. Cannot Intersect: Indifference curves cannot intersect, as each curve represents a different level of utility, and intersecting curves would imply contradictory preferences. Higher Curve = Higher Utility: Higher indifference curves represent higher levels of utility, and points on a higher curve are preferred to those on a lower curve. Indifference Curves Do Not Touch Axes: Indifference curves do not touch either axis, indicating that the consumer has positive preferences for both goods and does not prefer the complete absence of either good.
- 25. Properties of Indifference Curves 1 2 3 4 5 Downward Sloping Convex to the Origin Intersect Higher Curve = Higher Utility Indifference Curves Do Not Touch Axes
- 26. What are indifference curves, and why are they important in consumer behavior analysis? Discussion
- 27. ? How are indifference curves constructed, and what are their properties?
- 28. What is the marginal rate of substitution (MRS) on an indifference curve? Discussion
- 29. Marginal Rate of Substitution (MRS) The marginal rate of substitution (MRS) represents the rate at which a consumer is willing to substitute one good for another while keeping the level of utility constant.
- 30. ? What are the implications of a diminishing marginal rate of substitution (DMRS)?
- 31. Utility of a Product or a Service and its Approaches Indifference Curves Law of Diminishing Marginal Utility
- 32. What does the curve of law diminishing marginal utility look like?
- 33. Visual Representation of the Law of Diminishing Marginal Utility Units Total Utility Marginal Utility 1 10 10 2 18 8 3 24 6 4 28 4 5 30 2 6 30 0 7 28 -2 1 0 8 6 4 2 0 Law of Diminishing Marginal Utility Y X Marginal Utility Diminishing MU Zero MU A B C D E F 1 2 3 4 5 6 7 Units of orange M Negative MU U MU Curve is downward sloping because of the fact that consumption of successive units gives less satisfaction.
- 34. ? What are the Implications of the Law of Diminishing Marginal Utility?
- 35. Utility of a Product or a Service and its Approaches Indifference Curves Law of Diminishing Marginal Utility
- 36. Choose the Correct Answer Quiz a b c d How does the law of diminishing marginal utility impact consumer demand? It leads to a decrease in demand for a single good It leads to an increase in demand for a single good It leads to a variety of goods being demanded It has no impact on consumer demand
- 37. Choose the Correct Answer Quiz a b c d How does the law of diminishing marginal utility impact consumer demand? It leads to a decrease in demand for a single good It leads to an increase in demand for a single good It leads to a variety of goods being demanded It has no impact on consumer demand
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