Answer to Question #99223 in Microeconomics for Samuel

Question

Using the concept of Consumer Behaviour, discuss geometrically and algebraically, the income and substitution effects of quantity demanded to change in price. Aticulate the economic intuition that emanates from the derivation of the geometric and algebraic function.

Answer 1

The theory of consumer behavior (choice) is a theory that examines consumer behavior in the market, revealing the mechanism of interaction of needs and demand. The formation of market demand is based on the decisions of individual consumers. These decisions are dictated by the desire to achieve the greatest benefit, or return, or beneficial effect, at the available costs (opportunities). In economic theory, two main approaches to solving this issue are considered: from the point of view of marginal utility theory (cardinalist theory) and from the point of view of indifference curves (ordinalist theory).

Consider the cardinalist approach. The term "utility" was formulated by the English philosopher Bentham. Utility is the ability of goods to meet specific needs. This is a subjective concept, because the same products are differently useful for each individual. Distinguish between total (total) and marginal utility. General (aggregate) utility is the satisfaction that consumers receive from consuming a specific set of goods. Marginal utility is an additional (additional) utility extracted by a consumer from one additional unit of goods.

A decrease in marginal utility, associated with a decrease in the subjective assessment by the consumer of an additional unit of goods, means the law of diminishing marginal utility: the saturation of the need for a product satisfies the consumption of each subsequent unit of this good. Hence the need to lower prices in order to encourage consumers to increase purchases of such goods.

The principle of maximizing the total utility is as follows: each consumer must distribute his income so that the utility received from the last monetary unit spent on a particular product is the same, i.e. the buyer will show demand for the goods until the marginal utility per one monetary unit spent on this commodity becomes equal to the marginal utility for the monetary unit expended on another commodity.

Принципом максимизации полезности объясняется нисходящий характер кривой спроса отдельного индивида. Основными факторами, определяющими кривую спроса индивида на определенный продукт, являются: вкусы; денежный доход; цены других продуктов

The principle of maximizing utility explains the downward character of the demand curve of an individual. The main factors that determine the individual's demand curve for a particular product are: tastes; cash income; prices of other products