A production possibilities curve shows the maximum combinations of goods and services that can be produced with a given amount of resources

Economics & You

Imagine that you are taking two classes— economics and math. You can spend 10 hours per week studying. How will you decide how many hours to study for each subject? Read on to learn how a production possibilities curve helps people make such decisions.

Obviously, many businesses produce more than one type of product. An automobile company, for example, may manufacture several makes of cars per plant in a given year. What this means is that the company produces combinations of goods, which results in an opportunity cost.

Economists use a model called the production possibilities curve to show the maximum combinations of goods and services that can be produced from a fixed amount of resourcesin a given period of time. This curve can help determine how much of each item to produce, thus revealing the trade-offs and opportunity costs involved in each decision.

Imagine that you run a jewelry-making business. Working 20 hours a week, you have enough resources to make either 10 bracelets or 5 pairs of earrings. If you want to make some of both,

Theory of Consumer Behavior Basics

• The Theory of Consumer Behavior, like the Law of Demand, can be explained by the Law of Diminishing Marginal Utility.
• Consumer Behavior is how consumers allocate their money incomes among goods and services.

Consumer Choice and Budget Constraint:

Rational behavior:

• The consumer is a rational person, who tries to use his or her money income to derive the greatest amount of satisfaction, or utility, from it. Consumers want to get "the most for their money" or, to maximize their total utility. Rational behavior also "requires" that a consumer not spend too much money irrationally by buying tons of items and stock piling them for the future, or starve themselves by buying no food at all. Consumers (we assume) all engage in rational behavior.
• Preferences:
• Each consumer has preferences for certain of the goods and services that are available in the market. Buyers also have a good idea of how much marginal utility they will get from successive units of the various products they might purchase. However, the amount of marginal & total utility that the people will get will be different for every individuals in the group because all individuals have different taste and preferenes.
• Budget Constraint:
• The consumer has a fixed, limited amount of money income. Because each consumer supplies a finite amount of human and property resources to society, he or she earns only limited income.
• Every consumer faces a budget constraint
• There is infinite demand, but limited income
• Prices:
• Goods are scarce because of the demand for them. Each consumers purchase is a part of the total demand in a market. However, since consumers have a limited income, they must choose the most satisfying combination of goods based partially on prices. For producers, a lower price is needed in order to induce a consumer to buy more of their product.

Utility Maximizing Rule:

• To maximize satisfaction, a consumer should allocate his or her money so that the last dollar spent on each product, yields the same amount of marginal (extra) utility.
• When marginal utility are equivalent, consumer is in a equilibrium.

Marginal Utility per dollar: