The income of the consumer is also one of the major factors affecting the consumer’s equilibrium or objective of utility maximization. Consumer’s purchase decision of goods and services changes with the change in his/her income size because the size of income defines the consumer’s ability to pay and purchase. Here we will explain the meaning […]
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Consumer’s equilibrium is derived under ordinal utility analysis with the assumption of constant money income and prices of the goods. But in reality, consumer preference, money income, and prices are important factors affecting consumers’ objective of utility optimization. A consumer’s preference for goods and services directly changes with the change in income of the consumer
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Introduction to Consumer’s Equilibrium The prime objective of a consumer of goods and services is to derive the maximum or optimum level of satisfaction or pleasure or happiness keeping himself or herself within a fixed amount of budget or money income. Here we will discuss consumer’s equilibrium through the indifference curve approach. A consumer is
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Concept of Price/Budget Line or Budget Constraint The indifference curve displays the preference of the buyer. To find out the unit of two goods or quantity of two goods purchased by the household, we should know how much expenditure the household wants to sustain on these two goods and what are the prices of two
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Concept and Meaning of MRS The concept of the marginal rate of substitution (MRS) is an important tool for the indifference curve analysis of consumer demand. In the analysis of consumer behavior, the marginal rate of substitution (MRS) is the rate at which a consumer is willing to trade off or exchange one good for
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Concept of Indifference Curve (IC) In the microeconomic analysis, an indifference curve (IC) is a graph that shows different combinations of two goods or services that provides the same level of total satisfaction to the consumers. A consumer is always indifferent among any of the bundles of two goods on an indifference curve as they
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Learning Objective To explain the concept and assumptions of ordinal utility analysis Concept of Ordinal Utility Analysis The theory of consumer behavior helps us to observe and predict consumers’ responses to changes in prices, income, tastes and preferences, price of related goods, and promotional expenditures. Understanding the consumer’s responses to changes in such variables helps
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The techniques of optimizations are significant tools needed for measuring the efficiency of business firms. The economic agents have different motives and they all want to optimize such motives at the cost of their resources. Here we will talk about the basic concept and rules of the derivative as a technique for solving or analyzing
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Economics through its different theories and principles help to economic agents and participants in their decision-making processes and help them to get their objective fulfilled. For instance, a manager may have to think of what level of output he has to produce. Managers will produce the level of output that maximizes the form’s profit if
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The Cardinal utility approach provides a sound basis for analyzing consumer behavior based on the arithmetic measurement and expression of utility. However, economists have pointed out some criticisms or drawbacks of cardinal utility analysis. The following are the basic drawbacks or limitations of cardinal utility analysis. An incorrect assumption of cardinal measurement of utility According
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