Category: 4. Consumer Demand Analysis

What is Revealed Preference Theory? The Revealed Preference Theory states that consumer’s preferences can be revealed by the purchases they make under different income and price circumstances. The revealed preference theory was proposed by an American economist Paul Samuelson in his article ‘Consumption Theory in Terms of Revealed Preference’ in 1948. Table of Content [Show] The revealed preference…

What is Consumer Equilibrium? Consumer Equilibrium refers to a situation where the consumer has achieved the maximum possible satisfaction from the quantity of the commodities purchased given his/her income and prices of the commodities in the market. Table of Content [Show] The ordinal utility approach (which follows the two-commodity model explanation) provides two conditions with respect to…

What is Budget Line? Budget line represents various combinations of two commodities, which can be purchased by a consumer at the given income level and market price. The budget line is an important element of consumer behaviour analysis. In this section, let us study about the concept and importance of the budget line in detail. Table…

What is Marginal Rate of Substitution? Marginal rate of substitution (MRS) refers to the rate at which one commodity can be substituted for another commodity maintaining the same level of satisfaction. Table of Content [Show] The MRS for two substitute goods X and Y may be defined as the quantity of commodity X required to replace…

What is Indifference Curve? Indifference curve can be defined as the locus of points each representing a different combination of two good, which yield the same level of utility and satisfaction to a consumer. Table of Content [Show] Therefore, the consumer is indifferent to any combination of two commodities if he/she has to make a choice between…

What is Cardinal Utility? Cardinal Utility explains that the satisfaction level after consuming a good or service can be scaled in terms of countable numbers. The cardinal utility theory or approach was proposed by classical economists, Gossen (Germany), William Stanley Jevons (England), Leon Walras (France), and Karl Menger (Austria). Later on a neo-classical economist, Alfred Marshall…

What is Law of Diminishing Marginal Utility? The law of diminishing marginal utility states that as the quantity consumed of a commodity continues to increase, the utility obtained from each successive unit goes on diminishing, assuming that the consumption of all other commodities remains the same. Table of Content [Show] To put simply, when an individual continues to…

What is Utility? In economics, utility can be defined as a measure of consumer satisfaction received on the consumption of a good or service. The level of satisfaction derived by a consumer after consuming a good or service is called utility. The concept of utility is used in neo classical Economics to explain the operation of the law of…