Instructions: Explain the following.
1. What is consumer behavior?
Consumer behavior is “the mental and emotional processes and the physical activities of people
who purchase and use goods and services to satisfy particular needs and wants.” Moreover, consumer
behavior can be defined as “the activities and the actions of people and organizations that purchase and
use economic goods and services, including the influence on these activities and actions.” In other
words, consumer behavior can be said to be the study of how individuals make decisions on how to
spend their available resources (time, money, effort) on various consumption-related items.
2. What is law of diminishing marginal utility?
The law of diminishing marginal utility is a concept stating that as the consumption of an item
increases, the satisfaction a person derives from its use decreases. This means that items lose value the
more a person uses them. In addition to that,it can state that when a commodity becomes more
plentiful, the value of an individual unit decreases, and this statement ties us back to the law of
diminishing marginal utility. For example, a music fan attends their favorite band’s concert and loves it.
They gain additional satisfaction from seeing the band many more times, but as their concert
consumption increases, the thrill of each additional show is somewhat diminished. In other words, each
live show has a diminishing marginal benefit compared to the one before it.
3. What is the theory of consumer behavior?
Consumer theory is the study of how people decide to spend their money based on their individual
preferences and budget constraints. A branch of microeconomics, consumer theory shows how
individuals make choices subject to how much income they have available to spend and the prices of
goods and services. Consumer theory is useful but not flawless, as it is based on a number of
assumptions about human behavior. Building a better understanding of individuals’ tastes and incomes is
important because these factors impact the shape of the overall economy.
4. What is the theory of production?
Production theory is the study of production, or the economic process of producing outputs from
the inputs used. Production uses resources to create a good or service that are suitable for use or
exchange in a market economy. Furthermore, this can include manufacturing, storing, shipping, and
packaging. Some economists define production broadly as all economic activity other than
consumption. They see every commercial activity other than the final purchase as some form
of production.
5. What is the difference between economic costs and accounting costs?
Accounting costs are the same as explicit costs, which means they're the essential expenses of
running a business. Money spent on manufacturing, payroll, advertising and anything concerning the
organization is an accounting cost. On the other hand, Economic costs include both accounting costs and
implicit costs. They are costs calculated to determine the advantage of an alternative method over the
current strategy in use. They are not representative of actual money spent as they are potential costs.
6. What is the difference between short run production analysis and long run production analysis?
The short run refers to a relatively fixed period, typically characterized by fixed inputs, while the
long run represents a more flexible time frame where all inputs can be varied. Moreover, In the short run,
some inputs are fixed, while others are variable and in the long run, all inputs can be adjusted.
Futhermore, the short-run production function allows for limited adjustments in production capacity
due to the presence of fixed inputs while the long-run production function provides firms with the ability
to optimize and expand their production capacity by varying all inputs.