Answer to Question #175061 in Microeconomics for Lebo Letsoalo

Question

Prove that the utility approach and the indifference-curve approach yield
the same consumer equilibrium. Consider two goods, A and B, to explain
the utility approach and the indifference curve approach.

Answer 1

Consumption is the use of produced goods and services (economic goods) to meet the needs of members of society. Allocate production consumption, i.e. the use of economic resources in the production process, and the non-productive (final) consumption of goods by people to meet their vital needs. Buying a specific product, a consumer can achieve one or several goals, namely: to satisfy urgent needs, to increase the degree of comfort or self-confidence, to receive aesthetic pleasure, etc. Whatever the reasons for the consumer's decision, the main thing in the act of buying is that the consumption of a given product or service brings satisfaction to the consumer.

The ability of an economic good to satisfy one or several human needs forms the category of the utility of the good. The concept of utility was introduced into scientific circulation by the English philosopher I. Bentham and currently occupies one of the central places in economics along with the concept of value.

The theory of consumer behavior is a section of economic theory that studies consumer behavior when buying goods and services, in other words, how consumers spend their income between different options for goods and services that they are able to purchase in the market, how their demand is formed. The microeconomic theory of consumer behavior (consumption theory) serves as a methodological basis for an applied practice-oriented economic discipline - marketing.

Modern consumer choice theory is based on the following basic assumptions:

• the consumer's monetary income is limited, so he is forced to make his choice within the funds available to him - the so-called budget constraint;

• prices for goods and services on the market do not depend on the amount of goods purchased by any households, in other words, the situation of monopoly of an individual buyer is excluded in the market;

• consumers are well aware of the marginal utility of all goods and have a fairly distinct system of preferences in relation to the goods and services offered on the market;

• the goal of a rational consumer is to maximize the total utility, i.e. the desire to get maximum consumer satisfaction for their money.

From the point of view of the theory of consumer choice, a rational consumer choice will be a choice that maximizes the consumer's utility function under conditions of limited resources (money income). Rational consumer choice is based on Gossen's second law, also known as the consumer's equilibrium point, which states that the total amount of goods consumed is set such that the marginal utilities of each good are equal. In other words, while consuming several goods at the same time, an individual chooses for himself a set of them in which the marginal utilities of each good are equal or bring him the same satisfaction.