Reflective Exercise: Takeaway curries – when have you had enough?
1
Is the price of a product for immediate consumption – like a
takeaway curry – equal to its worth or benefit to a consumer?
The Setting
When you buy a product, such as a curry, what is it worth to you? More than you
paid, less than you paid or what?
Section 1: Setting the framework for investigating this question
A
Tick however many of the following you think appropriate
We shall consider a takeaway curry as a representative good and
apply the appropriate standard economic theory.
We will have to consider takeaway curries in particular because
consumers buy many different types of goods for different reasons.
We will assume that the demand curve for takeaway curries slopes
downward with respect to price.
We will assume that consumers make rational decisions.
We will assume that consumers will satisfy their needs and desires.
feedback page 4
B
Tick however many of the following you think appropriate
We will consider the demand curve.
We will consider both demand and supply.
We will consider shifts in demand and supply.
We will have to consider towns where there are many takeaway
outlets and those where there are few as this may affect the
price.
feedback page 4
a
b
c
d
e
a
b
c
d
C Tick however many of the following you think appropriate
a
Some consumers will get more benefit from buying a takeaway at
a particular time than others.
b
An individual consumer will not always get the same benefit from
a takeaway curry. It depends on how many curries they have
already consumed recently, the time and the place.
c
Economics assumes the benefits are all constant no matter how
much is consumed.
feedback page 4
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Takeaway curries – when have you had enough?
2
D Tick however many of the following you think appropriate
Most consumers will value the benefit from the consumption of
most of the units they consume of a good more than the amount
they pay for it.
b
A consumer will only buy a curry if the value of the benefit to them
from consuming it is equal to the amount they pay.
c
Typically, a consumer will value the benefit obtained from
consuming a curry at less than the amount they pay for it.
d
Typically, a consumer gets more benefit from their marginal
purchase of a curry than the amount they pay for it.
feedback page 5
a
E
a
b
c
d
e
Tick however many of the following you think appropriate
The benefit gained is the highest price that a consumer would
have been prepared to pay for that particular curry at that time.
The benefit gained is always equal to the actual price that a
consumer pays for that particular curry at that time.
The benefit to a consumer is given by their demand curve.
We will assume that consumers want to get the most marginal
benefit from their purchasing decisions (i.e. maximise marginal
utility, or marginal benefit, from consumption of a good).
We will assume that consumers want to get the maximum total
benefit from their income.
feedback page 5
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Takeaway curries – when have you had enough?
3
Section 2: Is the price that a consumer pays for a product for
immediate consumption – like a takeaway curry – equal to its worth or benefit
to them?
Yes
No
Argument in support of your decision
Use the diagram of an individual’s demand curve below in your answer. Assume the
market price is equal to £5, but in your answer also explore how much this consumer
is prepared to pay for different amounts of curry, such as at the price of £7.
Figure 1:An individual’s demand curve
Price
£
b
7
x
Market price=5
0
a
30
50
Demand or
Marginal Benefit
Quantity
(number per year)
You can continue your answer on another sheet if needed…
feedback page 6
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Takeaway curries – when have you had enough?
4
Feedback Section 1: Setting the framework
Now review your answers in the light of the economists’ approach below.
Were your answers the same? If not, how did they differ?
A
Economists will start from considering the case for a representative good as this is
the simplest (thus (a) is correct and (b) incorrect). Assuming a downward sloping
demand curve and that consumers are rational are the starting points of
standard economic theory (and this is developed in section C of this exercise).
Thus (c) and (d) are correct. Consumers will not usually be able to satisfy all their
wants and desires as they have a limited income (that is buying one good
involves an opportunity cost in terms of the other goods forgone): thus (e) is
incorrect.
B
We are not investigating why the price is at a particular level, which needs us to
consider demand and supply, only whether consumers are paying what it is
worth to them. It is therefore unnecessary to consider the supply factors that
affect price, or changes in demand and supply that affect price, or aspects of
competition. We shall just examine the demand side and take the price as given
for simplicity. The correct answer is (a).
C
We all have different tastes; some people like curries more than others. The
benefit a particular individual gets from a particular curry will depend on various
factors, such as how many curries they have consumed recently and how hungry
they are. Even if we are very fond of curry, if we have already eaten a large
number of curries in a short period of time we may prefer other foodstuffs for a
change. We do not assume that the benefits of consuming a good are
constant. Indeed they will diminish – technically this is known as diminishing
marginal utility. This gives us the downward sloping demand curve, where for a
small number of units we are prepared to pay a high price, but as quantity
increases the price we are prepared to pay falls. Thus the correct answers are
(a) and (b).
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Takeaway curries – when have you had enough?
5
D
We will only buy a unit of a good if it is worth it to us. Thus the gain we get from
buying a unit must greater than or equal to its price (since as rational beings we
will not buy if the cost is greater than the benefits we gain), so (b) and (c) are
incorrect.
In economics we assume diminishing marginal utility – that is the gain from
consuming a good diminishes as we consume more (as we considered in C
above). As we buy extra amounts of a good, the benefit declines but rationally
we will keep buying additional units as long as the benefits are greater than the
costs for that unit. If it not worth it to us we do not need to buy the curry. We will
stop buying at the point where the benefits equal the costs (= price we pay), so
the benefit from the marginal (or last unit purchased) will equal the price paid,
not be greater than it. Thus (d) is incorrect and (a) is the correct answer.
E
Since, as we established in (D), we will buy as long as benefits exceed the price
for that unit, (a) is correct and (b) is not. Rational consumers aim to get the
highest total benefit (or utility) from the purchases they make with their income,
thus (e) is correct. The consumers will consider the benefit of an additional unit
and compare it to the price (the marginal cost). They will consume until the
marginal benefit of an extra unit has declined until it is equal to the marginal
cost. Units before this will be worth more to them and there is a ‘consumer
surplus’ – they pay less than they think these other units are worth.
However, their objective is to do with their total position, not the situation on the
marginal, or additional, unit bought. They would maximise their marginal benefit
by buying just one unit! Thus (d) is incorrect. Consumers want to maximise their
consumer surplus.
The demand curve shows how much consumers are willing to buy at each price.
The total benefit is the area under the demand curve up to the price, not the
demand curve itself, so (c) is incorrect.
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Takeaway curries – when have you had enough?
6
Feedback Section 2:
Is the price that a consumer pays for a product for immediate consumption –
like a takeaway curry – equal to its worth or benefit to them?
Let’s assume you like curry. In a particular month, which would you like more – the
first takeaway curry you consumed or say the fourteenth?
Generally the benefit (or worth or utility) a consumer gets from consuming a good
declines as they consume more of it (see section 1C, what we referred to as
diminishing marginal utility).
How much will you pay for the first takeaway curry in a month compared to the
fourteenth?
If the benefit we get is less as we consume more of the good, generally we would
be prepared to pay less. The downward sloping demand curve in the diagram
reflects this.
How would you decide how many curries to buy?
For each particular curry, you need to relate the benefit you get to the price being
charged. If the price is lower or equal to the benefit to you from this curry, then buy
it.
Technically, the amount consumed is where the marginal benefit from consumption
of an additional unit is equal to the marginal cost, measured in opportunity cost
terms (see section1E). The price is a measure of the opportunity cost, as we could
have used that income to buy another good. As long as the marginal benefit is
higher than the price this will add to the consumer surplus, which is what the
consumer wishes to increase (until it reaches a maximum).
How can we relate this to the diagram?
Our individual consumes 50 curries at a price of £5 per year in the diagram.
However, the £5 is what the consumer is prepared to pay for the fiftieth curry. We
pay only what the marginal good is worth and earlier units of the good were worth
more to us. For instance, if we take a lower quantity, say 30 curries on our diagram,
we can show the consumer is willing to pay the higher price of £7.
This means overall we do NOT pay a price equal to what a good is worth to us. In
terms of the diagram the cost to the consumer, what we pay, is the rectangle (0 50
a 5). The total utility is shown by the area (0 50 a b). The triangle that is the
difference between the two areas is the consumer’s surplus, which is the excess of
what a person would have been prepared to pay over what that person actually
pays.
The overall answer to the question is…
* no, if we are considering the total benefit from consuming the good.
* yes, however, if we are considering the marginal unit of consumption.
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Takeaway curries – when have you had enough?
Reflection In your explanation did you:
1.
2.
3.
7
Yes
Partly
No
Correctly recognise the importance of the marginal
benefit?
Use the diagram in your answer by considering the
changing benefit at 50 and 30 curries? What did this
show?
Use the concept of consumer surplus? Can you show the
size of the consumer surplus on a diagram?
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.
Reflective Exercise: Takeaway curries – when have you had enough?
8
Notes for lecturers
Objectives of the exercise and prerequisites
Learning Focus: Developing an understanding of the diminishing marginal utility and
the relationship of this to price of a product. The exercise introduces the concept of
consumer surplus.
Threshold Concepts that are pivotal to this learning are economic modelling and
marginality. The threshold concept of opportunity cost is also referred to.
Prior Knowledge Required
Students need to have been introduced to the demand curve. The exercise can
be used as an introduction to marginal utility without it being covered previously, or
it can be used to reinforce concepts covered in a lecture.
Sequencing and timing
1. The feedback to section 1 should be given to students before they attempt
section 2. There are five parts to section 1 and section D and E are harder
than the earlier ones. Students may benefit from getting the feedback to
section A, B and C before going onto to these. In a tutorial situation this
can be done verbally.
2. In section 2 getting students to relate their answer to the diagram is important
and may be something you wish to draw attention to.
3. The exercise is likely to take 35-45 minutes if fully completed in class time.
Copyright: Embedding Threshold Concepts Project
20/08/07
This project is funded by the Higher Education Funding Council for England (HEFCE) and the Department for Employment and
Learning (DEL) under the Fund for the Development of Teaching and Learning.