Equilibrium position of ordinalist and cardinalist approaches in consumer behavior theory

This article discusses the equilibrium position of the ordinalist and cardinalist approaches in the theory of consumer behavior. It also explores the usefulness of the concept of elasticity in economics.

Economics

Table of Contents
Microeconomics..............................................................................................................................3
Question 1....................................................................................................................................3
a) Equilibrium position of the ordinalist and the cardinalist approaches in the theory of
consumer behavior...................................................................................................................3
b) Usefulness of the concept of elasticity’s.............................................................................4
Macroeconomics..............................................................................................................................8
Question 3:...................................................................................................................................8
a) Inflation...............................................................................................................................8
b) Costs of inflation.................................................................................................................8
References......................................................................................................................................14

Microeconomics
Question 1
a) Equilibrium position of the ordinalist and the cardinalist
approaches in the theory of consumer behavior
Ordinal Approach to Consumer Equilibrium
The systematic approach to consumer equity shows that harmonization has been achieved when
customers increase the overall need (performance) undetermined payment rate and current cost
of goods and campaigns. Procedure identifies two conditions for customer balance: the required
condition or position for the main application and an additional condition or condition for the
next application.
Ways to achieve balance:
Individual openings: Individual openings present another combination of two options (elements)
that offer the customer the same level of performance (benefit). Therefore, clients cannot use two
things with a strong connection.
Small scale of substitution (MRS): The margin transfer rate determines how quickly an item is
exchanged for another object with the aim of keeping the overall gain (behavior) as before
(Banwari, 2020).
Cardinal Approach to Consumer Equilibrium
The cardinal approach to consumer equity is to achieve equity when customers get maximum
satisfaction from specific assets (money) and different conditions. Buyers should be happy about
the cost allocation, so the ongoing unit spent on everything offers the same level of usage.

It is softer to understand the concept of how customers are transformed as a one-size-fits-all and
a multi-subject model. In an article model, consumer attire is specified when one item is fired,
although, in a multivariate model, a customer balance is specified when at least two articles are
consumed (Barnett, 2003).
1. Buyer balance - Product model: The item could be used by a buyer with a share of assets
(money) (such as an X). For the buyer, payment has equal benefits and item X can be exchanged
in an appropriate or large X structure. In case the negligible profit (MUx) of item X outweighs
net income (X) of cash, the expanding supply benefits of a buyer are in cash to pay for products .
2. Customer Balance - Multipurpose Model: The single item model relies on the irrational
assumption that the buyer is using the item. In any case, consumers eat a ton of goods and
campaigns. This model clarifies how customers who use multiple items reach their balance.
Clients are believed to have limited cash payments, and items received from a variety of items
are subject to limited income (Barnett, 2003).
b) Usefulness of the concept of elasticity’s
Elasticity is an essential cash sign, especially for product or management providers, as it reflects
what a product or administrator uses when costs fluctuate. In the phase where an object is
polymorphic, the value changes rapidly to the desired level. At a time when an item is volatile,
the amount shown may not change whether or not the cost of the item fluctuates. Switching to
flexible products means that demand increases as costs decrease and demand decreases as costs
increase.
Organizations operating in very poor operations offer changeable articles and administrations as
they typically set costs or comply with all-inclusive assessments. As the cost of an item or
administration reaches a level of flexibility, buyers and sellers quickly change their interest in
that item or handling. The other side of flexibility is uncertain. At a time when an item or
administration is unstable, sellers and buyers are less likely to change their interest in an item or
handling due to cost fluctuations.
The importance of application elasticity is as follows:

1. When setting the first level:
To ensure production profits, it is important to quantify the quantities of goods and services
based on the demand for these products. Since changes in demand are caused by changes in
prices, information on the elasticity of demand is needed to determine production levels.
2. Price setting:
The elasticity of demand for products is the basis of the price. The higher the price, the lower the
demand for the product and vice versa, with the knowledge of the demand, you can find the
coefficient by which the demand for the product decreases. If the demand for a product is
volatile, the manufacturer may charge a high price when setting a low price for a product with
elastic demand. Therefore, knowledge of the elasticity of demand is essential for regulation to
increase profits.
3. Regarding price discrimination against monopoly:
When it comes to the difference of monopoly, the question of the prices of the same product in
two different markets depends on the demands of each market. In markets with elastic demand
for products, several monopolists set low prices, and in markets with less elastic demand, they
set high prices.
4. When determining the entry price:
The concept of elasticity of demand is very important in determining the prices of various factors
of production. Production factors are paid according to demand. That is, if the demand for a
factor is unstable, the price is high and if the demand is elastic, the price is lower.
5. Preview of application:
Demand sustainability is a key factor in forecasting demand. Information on revenue elasticity is
needed to predict future demand for manufactured goods. Long-term product planning and
management relies more on revenue elasticity as managers can experience the impact of changes
in revenue levels on demand for products.

6. In Dumping:
The company enters the foreign market to release its products due to its strong foreign
competition.
7. When setting prices for generic products:
The concept of elasticity of application is very useful when setting prices for by-products such as
wool and lamb, wheat and straw, cotton and cotton seeds, etc. In this case, the individual cost of
producing each product is unknown. Hence, all prices are set according to level of market
demand. That is why products such as wool, wheat and cotton, which are very unstable, are very
expensive compared to by-products such as lamb, straw and cotton seeds which are in high
demand.
8. Definition of public policy:
Knowledge of the need for resilience will also help governments make policy decisions. Before
introducing legal price controls for a product, governments must consider the elasticity of
demand for that product. The government's decision to clarify the interests of the sector where
production is volatile and under the threat of monopoly control of profits depends on the demand
for production.
9. Support for the adoption of protection policies:
The government is evaluating the elasticity of demand for products in companies seeking
subsidies or protections. Grants or protections are provided only to businesses with elastic
demand for their assets. Consequently, they cannot resist foreign competition unless they reduce
their prices through subsidies or raise their import prices with high taxes.
10. In determining international trade income:
The benefits of international trade depend, among other things, on demand. Exporting goods
with low elasticity of demand and importing goods on demand, the country will benefit from
international trade. In the first case, you can charge a higher price for the product, and in the
second case, you can pay less for the product received from another country. So you can make
money both ways and increase your exports and imports.

Macroeconomics
Question 3:
a) Inflation
Inflation is the decrease in the purchasing power of money after some time. A quantitative
assessment of the reduction in purchasing power can be reflected in the increase in the level of
average value for individual vessels of products and companies in the economy over a given
period of time. An increase in normal costs such as rates usually means fewer purchases per unit
of money than in the past. As estimates fall, so do costs and so do goods and businesses. This
shortage of purchasing power affects the average total cost of the basics of the population and
ultimately hinders financial development. Industry analysts agree that a steady increase occurs
when a country’s liquidity supply falls faster than money development (Forbes, 2019).
The extension refers to rising costs for most products and businesses consumed on a day-to-day
basis or in total, such as food, clothing, housing, leisure, transportation, and basic goods. The
bulge estimates the typical long-term change in production vessel and industry costs. The reverse
and just used from time to time in the table of value of this conventional current is classified as
"rot". The expansion is in the face of declining purchasing power of public funds. It is proven as
a standard (Ha, Kose and Ohnsorge, 2019).
The bulge is a proportion of the normal changes in the normal cost of administration and goods.
This shows that as the cost of goods and business enterprises goes up, the purchasing power of
unit’s decreases in public money. The bloat is significantly different between the total interest
rate and the total investment of goods and enterprises. At the point when complete interest
surpasses the current stock of crude materials at the current value, the value level ascents
(Coibion, Gorodnichenko and Weber, 2019).

b) Costs of inflation
If a country's expansion is higher than its exchange rate, the intensity of the tariffs is low,
causing a drop in trade and a drop in the UK's current account. This is particularly difficult in
countries where exchange rates are fixed. For example, euro area countries such as Greece,
Ireland and Spain, for example, have expanded more than the northern euro area, resulting in a
normal deficit (over 10% of GDP in 2007). Instability has also encouraged financial
development).
• However, as the size of a nation's trade changes, a sharp increase can be offset by changes in
production rates. However, there are still financial costs as this is compounded by foreign
currency and more expensive imports.
2. Disorder and vulnerability
When the swelling is high, people don't know how much their money will cost. When the bulge
is high, organizations are generally less willing to contribute because they are skeptical of future
costs, benefits and expenses. This fragility and disorder can drive financial development. This is
probably the most troubling topic associated with high inflammation. Countries with low
expansion and security of monetary development are generally superior to countries with high
inflation.
3. The financial model of performance and disappointment
High inflationary growth is impossible and usually causes decay. Keeping expansion low will
ensure long-term financial improvement. For example, in the UK somewhere between 1992 and
2007, low pressure has contributed to the development of more sustainable money than ever
before.

In the late 1980s, Britain experienced rapid economic growth. However, this has led to increased
inflation. This inflationary growth was unsustainable and in 1991 the economy suffered a deep
recession with negative economic growth.
4. Record the cost
Any change in the cost of the price tag. When inflation is high, prices have to change frequently,
which means costs.
• However, modern technology has helped reduce this cost.
5. Cost of the shoe leather
To avoid losing interest in banking, people will have less money and will visit them more often.
6. Redistribution of income
Inflation tends to improve fishermen and worsen lenders. Inflation reduces the value of your
savings, especially if your savings are in cash or in a bank account with a very low interest rate.
Inflation tends to affect older people the most. Retirement often depends on interest savings.
High inflation can reduce the real value of real savings and revenues.

 But it depends a lot on a very flat rate. For example, if the investor receives a higher
interest rate than the rate of inflation, he will not lose it. This occurred between 2003 and
2008. However, between 2008 and 2015, the rate of inflation exceeded the interest rate,
causing investors to lose money during this period.
7. Cost of reducing inflation
High inflation is considered inappropriate, so the government / central banks believe it is best to
reduce it. This requires higher interest rates to reduce costs and investments. The reduction in
total demand (AD) will reduce economic growth and unemployment. Although inflation is
falling, other macroeconomic objectives need to be addressed. So it's a good idea to keep
inflation low and avoid more costly efforts to reduce it.
8. Challenge against the budget

When inflation occurs, the taxes we pay go up. This is because as wages rise, more and more
people fall into sectors with higher income taxes.
9. Decrease in real income.
A small increase in inflation during the specified wage limit could lead to a reduction in real
wages. For example, for the period 2010-17. The UK has secured a salary captain with an annual
salary allowance of 1%, particularly among civil servants. However, with inflation of 2 to 4%,
real wages of workers fell.
Graph sowing Inflation higher than wage growth 2010-2015 (falling real wages)
10. Loss of the debt owner
In the 1970s, many investors expected low inflation. So they bought government bonds at a flat
rate of around 6%. With a low inflation of 3-4%, they benefit from buying government bonds.
However, in the 1970s, inflation was much higher than expected and above stated interest rates.

As a result, money holders have seen the fair value of the bonds decline. This has made it easier
for the government to pay off debt, but it means investors will lose. It also reduces investors'
willingness to buy government bonds in the future.
Inflation of the 1970s created instability and led to a decline in the value of savings.

References
Banwari, V., 2020. Unit-6 Consumer Behaviour: Ordinal Approach. IGNOU.
Barnett, W., 2003. The modern theory of consumer behavior: Ordinal or cardinal?. The
Quarterly Journal of Austrian Economics, 6(1), pp.41-65.
Forbes, K.J., 2019. Has globalization changed the inflation process?.
Ha, J., Kose, M.A. and Ohnsorge, F. eds., 2019. Inflation in emerging and developing
economies: Evolution, drivers, and policies. World Bank Publications.
Coibion, O., Gorodnichenko, Y. and Weber, M., 2019. Monetary policy communications and
their effects on household inflation expectations (No. w25482). National Bureau of Economic
Research.