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Conceptual framework and basic assumptions of the theory of consumer – Cardinal utility

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The study of consumer behavior is done in two steps. It must first describe the preferences of individuals, that is to say how they prefer such rather than another. Then, the consumer with limited resources will search utility maximization under budget constraint. The combination of preferences and budget constraints determine consumer choices, and more precisely what combination of goods economic will choose the agents to maximize their utility.

Neoclassical theory depicts the consumer according to the characteristics of a homo economicus characterized in particular by its rationality.

Ordinal and cardinal utility

Within the neoclassical school, a central problem of the theory of the consumer is the construction of a demand function that can be the parallel for the supply function issued from the producer theory. This problem was solved in two stages, first assuming cardinal utility, measurable and comparable between goods, and then a ordinal utility, slightly less restrictive.

Cardinal utility

The precursors of the marginalist revolution ( Walras, Jevons, Menger) conceive utility as the feeling of pleasure associated with the consumption of a good. They defended the idea of a cardinal measure of utility assuming that the consumer was able to give an assessment of the utility that brought him any combination of properties. This option was the exact mirror of the supposed producer’s ability to predict the output for any combination of input data, and greatly simplified the analysis. For pedagogical reasons, it was also used, with some reservations, by Alfred Marshall.

For example, if the consumption of a quantity qA of a good A gives satisfaction 100 and a quantity qB of a good gives a satisfaction of 10, qA is equivalent to 10 times qB.

Budget constraint

Also called budget line , is nothing other than the income available to the consumer allowing it to buy goods whose prices are lower than income. The economic agent considers the budget as a constraint, which puts the product in a competitive situation. The consumer has no flexibility, it can not exceed its budget.

Consumer equilibrium

The consumer’s problem is to maximize his utility subject to budget constraint. Graphically, a combination that maximizes utility is necessarily a point of tangency between an indifference curve and the budget constraint .

Image http://en.wikipedia.org/wiki/File:Stephen%27s_Green_Shopping_Centre.jpg

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