Maximization of utility, consumer equilibrium and...

Maximization of utility, consumer balance and demand

Maximizing utility

Of the many alternatives, the consumer chooses such options and combinations of benefits that correspond to his ideas about the usefulness of purchases, commensurate with the possibilities of personal monetary income, i.e. budget opportunities. The consumer benefit effect of the good is correlated and compared by the buyer with the money paid for them. In this case, money are an important and sufficiently quantitative measure of utility for buyers. Another, less significant and sufficiently defined, measure of utility is the amount of benefits at a given price, necessary to meet the need. Each buyer individually and subjectively makes sure that the usefulness of the good is commensurate with his price. In this case, the purchase of its first unit brings the greatest satisfaction, as a result of which the consumer will carry out the second, third and subsequent purchases of such a benefit for himself. As the total volume of this utility will increase, the buyer may continue to purchase. But will he do this indefinitely, increasing the consumption of only one kind of benefits? First of all, the consumer is guided by maximizing the utility of the goods, purchased for this amount of personal money income (budget). With a fixed budget and constant current prices of goods, the consumer follows the rule: with decreasing marginal utility of goods, he strives to maximize the total useful effect, the overall usefulness of the purchases. Since the evaluation of utility is inseparable from the chain of purchased goods, the maximization of utility rule is achieved under the following condition: equal marginal utility of goods/an equal unit of monetary costs.

When one of the goods has a relatively large marginal utility per unit of monetary costs, the buyer will increase its purchase, seeking to maximize the overall consumer effect by these purchases. At the same time, purchases of goods with a smaller marginal utility will be reduced by the same unit of monetary costs. From the money spent on buying money, the buyer can first determine the average arithmetic value of the marginal utility for each of the purchased goods. Let's demonstrate this with the help of one more numerical example (Table 7.2).

Table 7.2. Select the most useful product

Selecting the most useful product

As can be seen from Table. 7.2, the buyer's consumer choice rule, which focuses on maximizing utility, reveals the irrationality of spending money on goods X and Z, since the most useful utility is the alternative product Y (its utility is 20) . Guided by the rule of consumer choice, the buyer can achieve equilibrium by replacing less useful benefits more useful. Replacing one good with another requires measuring the maximum number of benefits from which the consumer refuses to obtain one additional unit of another good. The increase in utility from the cost of purchasing the good U should balance the decline in the consumption of the good X. Ultimately, such substitutions provide the same level of utility benefits for an equal unit of monetary costs. The maximum consumer effect of a rational consumer is commensurable with the utility of goods, and with their prices. More precisely, prices allow you to measure the proportions of the purchased goods. In this case, the buyer

operates under the so-called rule of equal marginal utilities per unit of their monetary costs, according to which

In essence, the buyer redistributes his money costs in favor of a greater purchase of the good Y, rejecting the last unit of the good X Price X, equal to 100 monetary units in our example, will allow to buy an additional 2.5 units of the more useful good Y, which will give a higher useful effect. In monetary terms, it will be 2000 monetary units of the consumption of U. Less 1,000 money units from the savings for the good X the buyer receives a consumer benefit from a rational choice equal to 1,000 monetary units of beneficial effect. Having thus balanced its benefits and costs, the buyer achieves an equilibrium balanced by the rule of equal marginal utility by an equal monetary unit of expenditure (Table 7.3).

Table 7.3. Consumer balance (numerical example)

Consumer Equilibrium (Numerical Example)

Maximization of the utility of procurement is achieved under the condition of the same marginal utility for each additional unit of monetary costs. But the ratio of marginal utility of any benefits must be balanced and their prices. A rational consumer will balance the marginal utility of any good with marginal monetary costs from his own budget, guided by a rule that can be expressed as follows:

where X, Y - types of goods; Pr, Ru - the prices of these goods; 1 - consumer income, his personal budget.

Substitutions allow the consumer not only to compare marginal (additional) benefits and marginal (additional) costs, but also to achieve their balanced equality by distributing purchases in accordance with the size of the personal budget.

thematic pictures

Also We Can Offer!

Other services that we offer

If you don’t see the necessary subject, paper type, or topic in our list of available services and examples, don’t worry! We have a number of other academic disciplines to suit the needs of anyone who visits this website looking for help.

How to ...

We made your life easier with putting together a big number of articles and guidelines on how to plan and write different types of assignments (Essay, Research Paper, Dissertation etc)