Theory of consumer choice
Summary :
Table of Contents
- Introduction
- Total and marginal utility
- The law of diminishing marginal utility
- Consumer's equilibrium: cardinal utility approach
- Law of Equi-marginal utility
- Ordinal utility
- Indifference curve
- Budgetary constraint
- Consumer's equilibrium: the ordinal utility approach
- The consumer's optimal choices
- Change in income and consumer behaviour
- Change in price and consumer behavior
- Bibliography
Abstract
The concept of 'utility' was introduced to social thoughts by Bentham in 1789 and to economic thoughts by Jevons in 1871. The neo-classical economists devised the following system to measure the utility of a commodity. A neo-classical economist, Walras, coined a term 'util', meaning 'units of utility' and used money as the measure of utility.
The law of diminishing marginal utility is central to the Cardinal utility analysis of the consumer behavior. This law states that as the quantity consumed of a commodity increases per unit of time, the utility derived by the consumer from the successive units goes on decreasing, provided the consumption of all other goods remain constant. A consumer reaches equilibrium position when he maximizes his total utility given his income and prices of commodities he consumes. Analyzing consumer's equilibrium requires answering the question "how does a consumer allocate his money income among the various goods and services he consumes to arrive at his equilibrium?"
The law of diminishing marginal utility is central to the Cardinal utility analysis of the consumer behavior. This law states that as the quantity consumed of a commodity increases per unit of time, the utility derived by the consumer from the successive units goes on decreasing, provided the consumption of all other goods remain constant. A consumer reaches equilibrium position when he maximizes his total utility given his income and prices of commodities he consumes. Analyzing consumer's equilibrium requires answering the question "how does a consumer allocate his money income among the various goods and services he consumes to arrive at his equilibrium?"
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