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 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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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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The key purpose of the analysis of consumer behavior is to derive a consumer demand curve. Here we will discuss the derivation of the demand curve under cardinal utility analysis in the case of one commodity and case of two commodities. Learning Objective To deal with the derivation of the demand curve under cardinal utility
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Meaning of Consumer’s Equilibrium Consumer’s equilibrium is the position in which the consumer reaches the highest level of satisfaction given his or her money income and the prices of goods. It means a consumer is said to be in equilibrium when he/she can maximize his/her utility with the given limited resources. At the consumer’s equilibrium
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Meaning of Utility The term utility refers to the want satisfying capacity of a commodity or service. In another word, utility deals with the pleasure or satisfaction that individuals get from their economic activity. When a person has a desire for a commodity or for a service and if he contracts it and consumes it,
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The concept and theory of elasticity of demand play a vital role in the solution of economic problems and the determination of various economic policies. Mainly there are four types of elasticity of demand (price, income, cross, and advertisement). Here we will talk about the importance or uses of price elasticity of demand. The concept
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