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Consumer choice

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  • 1. 1.CONSUMER PRICE INDEX 2.MARGINAL UTILITY
  • 2.   measures the typical consumer’s cost of living the basis of cost of living adjustments (COLAs) in many contracts and in Social Security
  • 3. 1. Fix the “basket.” The Bureau of Labor Statistics (BLS) surveys consumers to determine what’s in the typical consumer’s “shopping basket.” 2. Find the prices. The BLS collects data on the prices of all the goods in the basket. 3. Compute the basket’s cost. Use the prices to compute the total cost of the basket.
  • 4. 4. Choose a base year and compute the index. The CPI in any year equals 100 x cost of basket in current year cost of basket in base year 5. Compute the inflation rate. The percentage change in the CPI from the preceding period. Inflation = rate CPI this year – CPI last year CPI last year MEASURING THE COST OF LIVING x 100% 4
  • 5. basket: {4 pizzas, 10 shakes} year price of pizza price of shakes 2007 100 20 100 x 4 + 20 x 10 = 600 2008 110 25 110 x 4 + 25 x 10 = 690 2009 120 30 120 x 4 + 30 x 10 = 780 cost of basket Compute CPI in each year using 2007 base year 2007: 100 x (600/600) = 100 2008: 100 x (690/600) = 115 Inflation rate: 115 – 100 x 100% 15% = 100 130– 115 x 100% 13% = 115 2009: 100 x (780/600) = 130 MEASURING THE COST OF LIVING 5
  • 6. The Consumer Price Index is a measure of the cost of living. The CPI tracks the cost of the typical consumer’s “basket” of goods & services.  The CPI is used to make Cost of Living Adjustments and to correct economic variables for the effects of inflation.  The real interest rate is corrected for inflation and is computed by subtracting the inflation rate from the nominal interest rate.  6
  • 7.    The Consumer Price Index is a measure of the cost of living. The CPI tracks the cost of the typical consumer’s “basket” of goods & services. The CPI is used to make Cost of Living Adjustments and to correct economic variables for the effects of inflation. The real interest rate is corrected for inflation and is computed by subtracting the inflation rate from the nominal interest rate.
  • 8.  Utility  The want-satisfying power of a good or service  Utility Analysis  The analysis of consumer decision making based on utility maximization  Util  A representative unit by which utility is measured
  • 9.  Marginal Utility  The change in total utility due to a one-unit change in the quantity of a good or service consumed Change in total utility Marginal utility = Change in number of units consumed
  • 10.  Diminishing Marginal Utility  The principle that as more of any good or service is consumed, its extra benefit declines  Increases in total utility from consumption of a good or service become smaller and smaller as more is consumed during a given time period.
  • 11.  Suppose you are very hungry and offered a burger to eat. The satisfaction which you derive from the first piece of burger ,would be the maximum because intensity of your hunger is more but eventually it goes on decreasing and therefore the satisfaction that you derive from the other bite goes on decreasing.

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