Choose-the correct word or phrase.

1. If you are ina hurry, it can be difficult to make a maximum/rational decision.

2.The amount of money you have to spend is your budget constraint/ deciding factors.

3. The maximum/rational speed limit an this road is 120 kilometres per hour.

4. Quality is often the budget constraint/ deciding factors when people choose something to buy.

5. Some people calculate/ issume how much they every week.

6. Green is a combination/alternative of yelow and blue.

7. When you buy something from a shop, you make a budget constraint/purchase.

8. When you calculate/ issume something is true you guess that it is true.

9. The use or satisfaction you get from something yon buy is called utility/ purchase.

10. Olive oil is a healthy combination/alternative to butter.

Consumer choices

It's a hot summer day. You have been out walking all morning and you're getting thirsty. It's also about lunchtime, and you're feeling pretty hungry, too. What luck! Here's a kiosk selling snacks. You’ve got six euros to spend. You can buy bars of chocolate or bottles of water... or a combination of both. Now you've got another problem: consumer choice.

If you're a neoclassical economist, however, there's nothing to worry about. Neoclassical economists believe that consumers make rational choices. Before a consumer buys something, they think about the cost and the amount of satisfaction the purchase will givethem. They then compare the price and satisfaction of possible alternative purchases. In the end, they buy what gives them maximum satisfaction at the lowest cost.

So. what will you buy from the kiosk? An important deciding factor is the amount have to spend. Economists call this your budget constraint. Your total budget is six euros. Bottles of water are two euros each chocolate bars arc one euro each. You could buy three bottles of water, or you could buy six chocolate bars. any combination. Or you buy any combination that adds up to your total budget. We can put all if this information on a budget line like the one in figure. The budget line shows what combinations of goods are possible.

Economists call these combinations are bundles. But when is the best bundle? This depends, on something called utility. Utilityis the economists' for the satisfaction we get from a purchase. Each good its own utility value for the consumer. The utility of a bundle depends on two things: the utility of the goods in the bundle and how much of each good is in thebundle. Figure 2 on page 25 shows the bundles of chocolate and water that give the same level of utility. This kind of chart is called an indifference curve. Any point on the curvehas the same utility value as any other point. For example, two bottles of water and two chocolate bars.

In figure 2, we assume that chocolate and water that chocolate and water have the same utility value for the consumer. But if water had a higher utility value than chocolate, the curve would be a different shape. Many things can affect the utility of a good. These include the cost of the good, the consumer's income and something called marginal utility.

To understand marginal utility, just think about chocolate bars. Every time you consume a bar of chocolate, the satisfaction you get from the next bar will be less. In other words, you get less utility every time you eat another bar. This decrease in utility is called the marginal utility. The marginal utility is the one of an additional item. For example:

Bars of chocolate Marginal utility Total utility

1 10 10

2 9 19

3 8 27

4 7 34

 

Put very simply, budget, price and level of utility will all affect choice at the kiosk. The neoclassical theory of consumer choice says that it is possible to calculate demand for products if we know this kind of information. However, not all economists agree!

В. Comprehension

Now read the text again and a nswer the questions.

1. According to neoclassical economists, what doconsumers want?

a) The most satisfaction at the lowest cost.

b) The cheapest product.

c) To spend all their money.

2. What is budget constraint?

a) An amount of money youwant to save.

b)A combination of money and satisfaction.

c) The total amount of money you have to spend.

3. What is a utility?

a) How much of a product you get.

b) The satisfaction you get from a product or service

c) The cost of a product.

4. What explains marginal utility?

a) The more satisfaction something gives you, the more you want it.

b) The more satisfaction something gives you, the less you want it.

c) The more you have of something, the less satisfactoin it gives you.

5. What do neoclassical economists believe about consumers?

a) They make logical decisions.

b) They always know what they want before they go shopping.

c) They do not know what they want.

 

Unit 4

Before you read

What do you think a company has to spend money on? Make a list of your ideas.

A vocabulary

Complete each sentence with a word or phrase from the box.

§ interest

§ maintain

§ part-time

§ revenue

§ keep track of

§ minus

§ rate

§ the short term

§ loan

§ nasty

§ relationship

1…………………what I spend by writing everything down in a notebook.

2. There is a ………………….between the quality of a product and its cost.

3. A company’s total……………….. is all the money it receives from sale.

4………………….. is the next few weeks or months. The long term may be next years or decades.

5. Five…………………… three is two.

6. Factories have to………………… their machines to keep them working property.

7. A…………………. worker works for only a few hours a day or a few days per week.

8. When someone or something is…………………they aren’t nice at all.

9. If you borrow money from a bank, you have to pay it back with an extra charge which is called……………….

10. When somebody lends money, they are giving a………………...

11. The ………………….. at which something happens is how fast it occurs.

 

Cost and supply

Companies have to spend money in order to make money. The money they spend to manufacture their goods or provide their services are called costs. Costs are important. Any company that doesn’t keep track of costs will soon be in trouble. And there are many different kinds of costs to keep track of such as fixed costs and variable costs.

Why are costs important? Well, for two reasons. Firstly, there is a relationship between costs and profit. Profit is overall revenue minus costs. Secondly, there is a relationship between costs and supply. To understand this relationship, we need to look at some types of cost.

One type is fixed costs. Fixed costs are costs that don't change. They are costs that the company has to pay each month, for example, or each year. The value of fixed costs will not rise or fall in the short term. Examples include the rent the company pays, the interest they have to pay each month on any loans and the salaries they have to pay for permanent employees. The good news about fixed costs is that they don't change with increases in production. For example, imagine a company produces 1,000 pens in January and 2,000 pens in February. The rent for the factory remains the same for both months. Variable costs, however, change (vary) with the size of production. The more pens the company produces, the more these costs increase. Examples of variable costs are the raw materials needed for production, the cost of electricity and the cost of maintaining machines that are working more. Also, the company may need to get more part-time employees. Their hourly pay is another variable cost. In unit 1 we said that the price of a product or service increases as supply increases. Variable costs are the reason why.

In a perfect world, variable costs will increase steadily as production increases. This is called constant return to scale and it is shown in figure 3 on page 27. However, this is not a perfect world! Sometimes, variable costs rise at a faster rate than production. This nasty situation, which is called a dis-economy of scale, is shown in figure 4 on page 27. On the other hand, companies sometimes get lucky. Variable costs can rise at a much slower rate than production. This is called an economy of scale, and is shown in figure 5 below.

 

В. Comprehension