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Chapter 2

Consumption and Production

Describe the meaning, purpose and characteristics of


consumption
o Definition of consumption
Consumption is an act of using and reducing the utility of
goods or services to fulfilled needs.
Konsumsi adalah tindakan menggunakan dan mengurangi
kegunaan barang atau jasa untuk kebutuhan terpenuhi.

Characteristics of consumer goods


a. They are economic goods
b. The utility of goods decreases after use
c. They are used to fulfilled a certain need directly
Classification of consumer goods
a. Based on the way of obtaining, consumer goods are
classified into:
Economic goods
Free goods
b. Based on the method of processing, consumer goods
are distinguished into:
Raw material
Half finished material
Finished material
Classification of consumer goods
a. Based on the function, consumer goods are devided
into:
Substitutive goods pengganti
Complementary goods
Purpose of Consumption
The purpose of consumption is to fulfilled human needs
Theories of Consumption
o Cardinal Approach pendekatan kardinal
o The Cardinal approach in the theory of consumer behavior is
also known as marginal utility approach.
o The use of cardinal approach in consumer analysis is based on
an assumption that the satisfaction gained by a consumer
from consuming a good can be measured or quantified by
some objective quantities, such as money, numbers, or pieces
dapat diukur dengan angka
o Cardinal Approach
o The more the goods are consumed, the greater the
satisfaction for the consumer semakin bnyak yg dikonsumsi
semakin puas
o A rational consumer will always try to maximize the
satisfaction they get from their disposable income selalu
berusaha memaksimalkan keb. dr pendapatan
o Cardinal Approach
Gossens Law I

Gossens Law I says: If need fulfillment is done


continuosly, the enjoyment initially increases, but it
gradually decreases until it reaches a point of saturation
lama-lama akan bosen
a. Cardinal Approach
TU 1) Gossens Law I
Tabel of consumption according to Gossens Law I
Food
Consumptio
n
TU, MU

First
Second
Third
MUFourth
Fifth
sixth

Total
Utility
(TU)

Marginal
Utility (MU)

40
70
90
100
100
90

40
30
20
10
0
-10

Q
a. Cardinal Approach
1) Gossens Law I
Total Utility is the total satisfaction with the
entire goods and services consumed Utilitas
total adalah seluruh kepuasan total dengan
barang dan jasa yang dikonsumsi
Marginal Utility is addition of satisfaction when
one consumes goods or services continuously
Utilitas Marjinal adalah penambahan kepuasan
ketika seseorang mengkonsumsi barang atau
jasa secara terus menerus
b. Cardinal Approach
1) Gossens Law I
Because Gossens Law I also explains marginal utility (MU) is
also known as the law of diminishing marginal utility
penurunan utilitas marjinal

100
90
80
70
Table and graph of TotalUtility
TU and Marginal Utility by Gossens law I
60
50
Food
Total
Marginal
40
Consumpti Utility
Utility (MU)
30
on
(TU)
20
TU, MU
10
First
40
40
Second

70

30

Third

90

Fourth

100

20
1
10

Fifth

100

sixth

90

MU
2

-10

a. Cardinal Approach
2) Gossens Law II

Gossens Law II says: People will consume things in


such as way that the marginal utility of each goods and
service consumed will stay the same Hukum Gossen
II yang mengatakan: "Orang-orang akan
mengkonsumsi hal-hal sedemikian rupa sehingga
utilitas marjinal dari setiap barang dan jasa yang
dikonsumsi akan tetap sama"

a. Cardinal Approach
2) Gossens Law II

For example, a goverment employee earns a salary of


Rp. 200.000,- and receive this salary in cash with ten
Rp.20.000,-bank notes. Then has to satisfy the
following need such as meals, clothing, rent,
transportation, and educational course.

100
90
80
70
60
50
a. Cardinal Approach
40
2) Gossens Law II
30
20
The use of money that he earned is shown:
10
The satisfaction value
Position
of money

Meals

Clothing

House
rent

Transportati
1
2
3
on

Educational
4
5
6
Course

10

10

a. Cardinal Approach
2) Gossens Law II
The explaination of how to use all ten Rp. 20.000,- bank notes for each type of
need is as follow:

Fulfillment of the need for meals using the first Rp.


20.000,- bank notes will yield a satisfaction value of 10

Fulfillment of the need for meals using the second


Rp.20.000,- bank notes will yield value of 9

Fulfillment of the need of meal using the third, fourth,


fifth and so on to satisfy the need for meals will yield a
value of 8, 7, 6, ..., 1, respectively

Otherwise, fulfillment of the need for clothing using the


first Rp. 20.000,-bank notes will yield a satisfaction
value of 9

List of an employees needs and the marginal utility

Positio
n of
money

The satisfaction value


Meal
s

Clothi
ng

Hous
e rent

Transportati
on

Education
al Course

10

10

Dengan menggunakan pendekatan kardinal, kepuasan maksimum


yang akan diperoleh oleh konsumen dapat dinyatakan
matematis sebagai berikut:

By using cardinal approach, the maximum satisfaction

MUA

that will be gained by a consumer can be expressed

MUB
=

mathematically as follow:

PA

PB

Example:

Mr. Heru has an income of 140.000. He wishes to buy two types of goods,
goods A and goods B, each having a price of 10.000 and 20.000 per unit.
The values of the total utility and marginal utility are shown as follow:

Goods A

TU

MU

Goods B TU B
1

50

50

94

44

132

38

164

32

190

26

210

20

224

14

232

MU B

80

80

156

76

228

72

296

68

360

64

420

60

476

56

528

52

How many units of goods A and B should Mr. Heru buy so that he can attain a
maximum satisfaction from consuming these two types of goods, providing that
Mr. Heru has to spend all his income on these goods?
Answer:

MUA

MUB
=

PA

PB

We can see some combinations of marginal utility values that can satisfy:
-

three units of goods A and two units of goods B

four units of goods A and five units of goods B

five units of goods A and eight units of goods B

Goods A

TU

MU

Goods B TU B
1

50

94

132

164

190

210

224

232

MUA

50

80

80

156

76

228

72

296

68

360

64

420

60

476

56

528

52

44

38

32

26

20

14

three units of goods A and two units of goods B


MUB

MU B

38

76

=
PA

=
PB

10.000

four units of goods A and five units of goods B

MUA

MUB

32

64

=
PA

=
PB

10.000

MUB

26

52

=
PA
Goods A

20.000

five units of goods A and eigth units of goods B

MUA

20.000

=
PB

10.000
TU

50

94

132

164

190

210

224

232

MU

20.000

Goods B

TU B

MU B

80

80

156

76

228

72

296

68

360

64

420

60

476

56

528

52

50

44

38

32

26

20

14

After this, we also have to determine whether Mr. Herus income can be all spent
from using one of these three pairs. We have to calculate how much money will
be spent for each pair.

three units of goods A and two units of goods B

Total income spent

= (3 x Rp. 10.000) + (2x Rp. 20.000)


= Rp. 30.000 + Rp. 40.000

= Rp. 70.000

four units of goods A and five units of goods B

Total income spent

= (4 x Rp. 10.000) + (5x Rp. 20.000)

The most suitable for Mr.

= Rp. 40.000 + Rp. 100.000Herus requirements


= Rp. 140.000

five units of goods A and eight units of goods B

Total income spent

= (5 x Rp. 10.000) + (8x Rp. 20.000)


= Rp. 50.000 + Rp. 160.000

= Rp. 210.000

b.

Ordinal Approach

The ordinal approach is used because the cardinal approach


was thought to have a number of disadvantages, one of
these being the cardinal approaches reliance on subjectivity
in determining the values of MU and TU Pendekatan ordinal
digunakan karena pendekatan kardinal dianggap memiliki
sejumlah kelemahan, salah satunya menjadi ketergantungan
pendekatan kardinal pada subjektivitas dalam menentukan
nilai dari MU dan TU

The ordinal approach is done by using an analysis of


indiference curves menggunakan analis kurva indeferen

b. Ordinal Approach

An indiference curve shows various consumption mixes of


two goods which give the same utility Sebuah kurva
indiference menunjukkan konsumsi berbagai campuran dari
dua barang yang memberikan utilitas yang sama

An indiference curve is a curve that shows various


consumption mixes of two goods which give the same utility

b. Ordinal Approach
An illustration of ordinal approach:

Table of various combinations of consumption of two goods each result in


the same level of satisfaction
Ice Cream

Doughnuts

Satisfaction point
Representation

12

- All points representing the consumption-mix of doughnuts and ice cream show
the level of satisfaction - Semua poin yang mewakili konsumsi-campuran donat
dan es krim menunjukkan tingkat kepuasan
- To maintain this same satisfaction level, every decrease in ice cream
consumption has to balanced by an increase in doughnut consumption - Untuk
mempertahankan tingkat kepuasan yang sama, setiap penurunan konsumsi es
krim harus diimbangi dengan peningkatan konsumsi donat
b. Ordinal Approach : An illustration of ordinal approach:
If the table is changed to a graphical form, then we have an indiference
curves.
Ice
Crea
m

Doughnu
ts

Satisfaction
point
Representat
ion

12

An Indifference curve located further from the point of origin (zero point)
shows a higher level of satisfaction

The satisfaction level of U3 is higher than that of U2, and U2 is higher that
of U1

Indifefrence curves do not intersect tidak berpotongan

Production

Definition of production
Production is an activity of increasing the usefulness (utility) of existing
goods or of increasing new goods which are useful for satisfying human
needs Produksi adalah kegiatan untuk meningkatkan kegunaan (utility)
barang yang ada atau barang baru peningkatan yang berguna untuk
memuaskan kebutuhan manusia

Purpose of production
In general the purpose of production is to satisfy human needs in
order to attain prosperity
For producers, the purpose of production is to make profits and to
ensure their companies survival
For consumers, the purpose of production is to provide various
goods and services to satisfy their needs.

Definition of factors of production:


Factor of production are anyting required to produce goods and services
Factors of production:
1. Natural resources
Natural resources are the wealth and riches provided by the nature, which
can be utilized in production processes
2. Labor
Labor is the human factor of production, who directly or indirectly
performs production activities
Factors of production:
3. Capital

Capital comprises goods which have been produced before and then used
in subsequent production processes to make other goods and services
4. Skill and entrepreneurship
Skill and entrepreneurship are knowledge and capabilities possessed by
someone that can be used to utilized other factors of production optimally
when producing goods and services

Theory of production:
Theory of production addresses the behavior of producers in producing
goods and services
A production function:

A production function is a mathematical expression showing a relationship


between the input and output of a production process.

A production function can be expressed by the following equation:


Q = f(C, L, R, T)
where:
Q - quantity

R - resources

C - capital

T - technology

L - Labor

An isoquant curve

An isoquant curve is a curve which shows various combinations of two


factors of production that result in the same production level.
Sebuah
kurva isokuan adalah kurva yang menunjukkan berbagai kombinasi dari
dua faktor produksi yang menghasilkan tingkat produksi yang sama.

An isoquant curve
Input combination to produce 50 units of output
Combina
tion

Outp
ut

Capi
tal

Lab
or

50

50

50

50

An isoquant curve

An isoquant curve is a curve which shows various combinations of two


factors of production that result in the same production level.

The law of Diminishing Marginal Product

The law of diminishing marginal product states that if the factors of


production are increased over and over again, than the production result
(output) will keep increasing until reaches a certain point at which it will
begin decline Hukum yang semakin berkurang menyatakan bahwa jika
produk marjinal faktor-faktor produksi yang meningkat lagi dan lagi, dari
hasil produksi (output) akan terus meningkat sampai mencapai titik
tertentu di mana ia akan mulai penurunan
The law of Diminishing Marginal Product
Numb
er of
worke
rs

Total
Outp
ut

Margin
al
Produc
t

Avera
ge
Produ
ct

10

17

5,7

23

5,8

28

5,6

27

-1

4,5

ECONOMIC ACTORS

In economic, these economic actor are devided into:


a. Household

A household is a union consisting of any other individuals that are


considered to be a part of the family. Rumah tangga adalah sebuah
persatuan yang terdiri dari perorangan lainnya yang dianggap sebagai
bagian dari keluarga.
b. Producer circles
Producer circles, or more commonly known as business corporations
are legal and economic entities which compries factors of production and
whose purpose is to make profits Produser lingkaran, atau lebih dikenal
sebagai perusahaan bisnis berbadan hukum dan ekonomi yang compries
faktor-faktor produksi dan yang tujuannya adalah untuk membuat
keuntungan
c. Goverment
Based on clauses of article 33 of the UUD 1945, the government is
obliged to act as an economic actor in the Indonesia economy. The
government has established many other similar state owned companies
(BUMN) Berdasarkan klausa pasal 33 UUD 1945, pemerintah wajib
bertindak sebagai pelaku ekonomi dalam perekonomian Indonesia.
Pemerintah telah membentuk banyak perusahaan negara yang lain yang
serupa Milik Negara (BUMN)
d. Foreign communities
Foreign communities are another economic actor that has to be
taken into account. Some of goods and services to satisfy these needs can
be produced by domestically. However, there are many goods and services
needed by the population which have to be imported from abroad
Masyarakat asing adalah aktor lain ekonomi yang harus diperhitungkan.
Beberapa barang dan jasa untuk memenuhi kebutuhan tersebut dapat
diproduksi oleh negeri. Namun, ada banyak barang dan jasa yang
dibutuhkan oleh penduduk yang harus diimpor dari luar negeri
In conducting economic activities, the four economic actors will interact
with each other:

Households will buy consumption goods from companies, while companies


will acquire factors of production from household

Companies and households will pay taxes(pajak) to the government, while


the government will build infrastructures and facilities for the
benefits(kepentingan) of household and companies

Households, companies, and the government export goods to foreign


communities. On other hand, we also import goods from foreign
communities

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