Microeconomics: Cardinal and Ordinal Approach to Consumer Equilibrium

This document discusses the cardinal and ordinal approach to consumer equilibrium in microeconomics. It explains how consumers achieve balance in single and multiple commodity frameworks. It also explores the usefulness of elasticities in understanding consumer behavior. The document provides a comprehensive overview of these concepts in microeconomics.

Microeconomics

Contents
Microeconomics..............................................................................................................................3
Question 1:...................................................................................................................................3
a....................................................................................................................................................3
b....................................................................................................................................................8
Macroeconomics............................................................................................................................10
Question 4:.................................................................................................................................10
a..................................................................................................................................................10
b..................................................................................................................................................11
References......................................................................................................................................13

Microeconomics
Question 1:
a.
Cardinal-Approach to Consumers Equilibrium points out that consumer achieves
his/her balance when he/she obtains the optimal happiness for resources (cash) and other factors.
The customer is stated to be very pleased because he assigns his spending in such manner
that last unit of cash expended on each item yields same amount of utility. The principle of
how consumers maintains his or her balance can be better understood by means of a single
commodity framework as well as multiple commodity framework. In single commodity
framework, the consumer balance is established while buying single commodity, and in multiple
commodity framework, the consumer balance is established when purchasing two or even more
commodities (Banwari, 2020).
Consumer Equilibrium: One Commodity Model: Assume consumer with a defined amount of
capital (money) consumes single commodity, says X. For the customer, both their income as
well as product X could have their corresponding utilities, as well as either will hold that income
in form of asset and then he can trade it for commodity X. If the marginal value of product X
(MUx) is higher than marginal value of cash (Mum), so utility-maximizing consumer would
swap his money benefit for commodity. On the basis of assumption, marginal value value
of commodity is also stated to be decreasing for each of successive unit and, although the
marginal value of cash remains stable, the customer spends his cash income towards commodity
X so long as the MUx > Px (Mum). Price of product is Px, as well as Mum is equivalent to one.
As a result, the user hits his or her equilibrium when,

Consumer Equilibrium: Multiple Commodity Model: single commodity framework is centred
on unrealistic premise that single commodity is purchased by the consumer. Even so, in everyday
life, people buy a vast variety of products/services. One such model explores how consumer who
purchases several commodities achieves its equilibrium. It is presumed that consumer has a small
income in cash and that utility extracted from multiple products is subjected to falling returns.
Also, multiple goods yield various levels of the marginal utility, including some yield greater
MU and others yield fewer MU than others. As consequence, the logical and utility-maximizing
customer would choose goods on basis of their services. This means that the customer would
first purchase certain goods that contain the highest profit, therefore second highest (Winoto,
2018).

Thus, according to the graph, the customer is in balance when Mu derived from every unit of
spending on two goods, X and Y, is same. The philosophy of demand is thus based on idea that
the customer is seeking to increase its use of the volume of money expended on products and
services. As well as the customer is in control as he receives the full gratification
from consumption.
Ordinal-Approach to consumer Equilibrium ensures that consumer is stated to have
reached a balance by optimising his overall utility (satisfaction) for level of their income and
current prices of products/services. Ordinal approach describes two aspects of the consumer-
equilibrium:
First Order Condition: Within first order condition, customer achieves his balance in same way
as does in cardinal solution of two-commodity model. This is described as follows:
Thus, necessary condition of cardinal framework to consumers equilibrium could be described as
follows:
Supplementary/Second Order Condition: condition of first-order is needed but not adequate.
Therefore, second order or the supplementary requirement demands that the required condition
be done at the maximum practicable indifference curve on indifference map (Chaudhary, 2020).

There seem to be three indifference lines in diagram above, Respectively. IC1, IC2, as well as
IC3 provide hypothetical consumer indifference chart. AB line is potential budget line. On point
'E' indifference curve/graph IC2 as-well-as budget line AB converge and thus slope of IC2=AB.
tAt that same level, both the required condition and supplementary condition are met and, as a
result, the user is still in the equilibrium at the point 'E.'
We recognize that between 2 points on indifference curve:
ΔY, MUy = ΔX. MUx
Therefore, slope of indifference curve could be described as follows:

In the diagram above, at level 'E,' MRS x, y = Px/Py as well as consumer is stated to have
reached equilibrium at that same point. IC2 is the tangent to the expenditure line AB, indicates
that the customer has achieved the maximum possible disregard for the amount of his profits and
the selling price of commodities and services. Therefore, at level 'E' the user absorbs quantity of
OQx of the X and OQy of the Y, which gives him the full utility.
b.
Usefulness of the concept of elasticities: Elasticity is crucial economic metric, especially
for sellers/suppliers of products or services, since it shows how many services or products
consumers purchase as prices adjust. When the commodity is elastic, price change easily leads in
a shift in the quantities ordered. If the product is the inelastic, there is no shift in quantity of
production, along with the shift in price of the product. The transition that is seen for elastic good
is increase in demands as prices decline and a decline in demands as prices grow. Elasticity often
conveys valuable details to customers. If the selling price of the elastic product falls, businesses
are probably to decrease quantity of products or services that are able to deliver (Pai and Pretko,
2018). If the stock price increases, companies are expected to raise the amounts of products they
are able to sell. That's critical for customers who are in search of a commodity but who are at risk
of scarcity. Usually, products that are the elastic are either needless products and services as well
as those with which rivals provide readily available alternative products and services. For
instance, airline sector is agile and it is a dynamic industry. If one airline chooses to raise price of
its tickets, customers will use some other airline as well as airline that has increased its fares may
see a drop in demands for its services. Besides that, gasoline is comparatively inelastic product,

since many buyers have no alternative but to purchase petrol for their cars, irrespective of market
price. Companies competing in intensely competitive markets deliver goods and services which
are versatile, since corporations strive to be the price-takers. If price of product or
service hit point of elasticity, suppliers and consumers are quick to change their appetite
for product or service. Items or services which are elastic are all either unnecessary and can
quickly be substituted by a replacement (Liew, Zhang and Zhang, 2017). Companies working in
ferociously competitive sectors offer products or services which are agile and they appear to be
a price-takers and those that have to embrace prevailing rates. When price of a product or service
approaches the level of elasticity, suppliers and consumers will easily change their appetite for
such a product or service. The inverse of the rubber is elastic. If a product/service is inelastic,
traders and purchasers are not quite as prone to modify their appetite for a good or service here
as the price increases. In the formulation of government actions, particularly fiscal policies, the
theory of price's elasticity demands is relevant. Government can impose greater taxation on
products which inelastic demand, while lower taxes are levied on products having elastic
demand. Price elasticity of demand tends to assess price paid to variables of output. The
contribution of each element in national product shall be measured in proportional towards its
demand for the economic activity. If the market for a specific variable is inelastic relative to
other variables, it may trigger more incentives.
For entrepreneurs, the principle of elasticity is quite relevant. Whenever good is
requested elastically, profits are improved by increasing its price. If the market is inelastic, will
charge higher prices for a product. In attempt to increase its net profit, monopoly owner would
automatically set price at higher level if market is inelastic towards its goods. If elastic
requirement is met, price will decline so that the full benefit will be created from the increased
revenue. So, we consider that monopolists often benefit from the principle of the elasticity in
reality (Jamali, Shojaee and Mohammadi, 2020).

Macroeconomics
Question 4:
a.
Consumer spending on products and services: often recognized as consumption, that covers
demands for durables, – for example audio-visual devices and cars and non-durable products,
such as foods and beverages, that is "consumed" as well as should be re-purchased. Consumer
spending is the largest portion of total demand in economy, which corresponds to overall
consumption by individuals and households towards products and services within economy.
Consumption expenditure relies on variables like discretionary incomes, per capita incomes,
debt, market views of potential economic circumstances as well as interest rates. An significant
factor to remember is that demand expenditure doesn't include the expenditure on residential
buildings, which is included in investment expenditure portion (Tacchella, Mazzilli and
Pietronero, 2018).
Capital Investment – Which is the expenditure of capital products like plant and machinery and
new facilities to manufacture more customer products in future. Investment requires
investments on working capital like completed and semi-finished products. For instance, a small
portion of capital expenditure is a shift in valuation of stocks/shares. Producers may notice either
that demands is stronger than supply (i.e., stocks are falling) or that demand remains lower than
anticipated and under current production. Capital Investment also refers to overall expenditure
towards new capital goods and facilities like machinery, vehicles, product adjustments,
investments in non-residential frameworks and residential systems. Investment spending relies
on variables including interest rates (as calculated by borrowing costs), potential projections
of economy, and political benefits (like tax benefits/subsidies for investment in the renewable
energy) (such as tax benefits or subsidies for investing in renewable energy).
Government Spending – These are the expenditure of products and services rendered by the
State, namely public products and goods of merit. Decisions about how much government
spends every year are influenced by changes in economy and by government's political goals.
Transfers payments in form of benefits (example state pensions and allowances for job-seekers)

shouldn't be used in actual budget spending as they're transfer from one category (i.e. individuals
charging income taxation) to another (for example pensioners drawing state pensions having
retired, families on lower incomes). Government spending is the overall sum of government
expenditures on housing, investment, security and military supplies, public sector buildings,
medical services as well as government workers. It eliminates expenditure on transfer
contributions, like pension plans, grants and allocations of assistance to other nations in need
(Shkolnikov, Andreev, Tursun-Zade and Leon, 2019).
Imports and Exports: Exports of products/services sold abroad are inflows of demands (injection)
into circular flow of revenue and investment, which contributes to overall demand. Imports of
products/services. Imports are removal of production (leakage) from circular flow of
incomes and investment. It is necessary to note that here aggregate demand is overall demand for
locally manufactured products and services; thus, exports are attributed to overall demand, while
imports are deducted. The calculation of exports less imports is considered as Net Exports, an
essential predictor of the aggregate demand.
b.
GDP isn't really perfect measure of the well-being. Any of the aspects that lead to a
healthy life are remain out of GDP. All of them is recreation. Suppose, for example, that
everybody in economy immediately began working each day of week, instead of having a
weekend recreation. More products and services will be generated and GDP will increase.
However, considering the rise in the GDP, we cannot say that everybody will be better-off.
Losses of decreased leisure would balance the benefit from the production and sale of a larger
quantities of products and services (Zhu, Ma, Yang and Ge, 2017).
Since GDP uses consumer values to value products and services, this eliminates value of
virtually all transaction that takes part outside economies. GDP, in fact, ignores the importance
of products and services manufactured at home. Whenever a chef cooks a tasty meal and sells it
in his restaurant, the importance of that food is a component of GDP. However, if chef
cooks same meal for his relatives, value added to raw materials is remained out of the GDP.
Likewise, child care given in the day-care facilities is component of GDP, while maternal
cares at home isn't really component of the GDP. Volunteer service frequently adds to well-being
of all those in the society, although GDP doesn't quite reflect that contributions.

Another aspect that the GDP excludes or does not is quality of environment.
Imagine government's abolition of all environmental controls. Firms would then be able to
manufacture products and services thereby taking into account the emissions they generate, and
GDP will grow. Well-being will most probably decline, though. The degradation in the condition
of air including water will more than outweigh the benefits from increased production. GDP also
states little about income allocation. A community wherein 100 people provide annual income of
around $50,000 has GDP for $5 million as well as, not unexpectedly, GDP of $50,000 each
person. So is a world in which 10 individuals obtain $500,000 whereas 90 suffer for none at all.
Less people will look at these two cases and call these identical. GDP each person shows us what
occurs to average person, but there is a vast spectrum of individual experiences behind its
average (Chang and Li, 2018).

References
Books and Journals:
Banwari, V., 2020. Unit-6 Consumer Behaviour: Ordinal Approach. IGNOU.
Winoto, H.T., 2018. Asymmetric Consumer Information in Behavior Relationship With
Marketing Management. Dialogo, 5(1), pp.180-186.
Chaudhary, K.R., 2020. Block-2 Theory of Consumer Behaviour.
Pai, S. and Pretko, M., 2018. Fractonic line excitations: An inroad from three-dimensional
elasticity theory. Physical Review B, 97(23), p.235102.
Liew, K.M., Zhang, Y. and Zhang, L.W., 2017. Nonlocal elasticity theory for graphene modeling
and simulation: prospects and challenges. Journal of modeling in Mechanics and
Materials, 1(1).
Jamali, M., Shojaee, T. and Mohammadi, B., 2020. Analytical buckling and post-buckling
characteristics of Mindlin micro composite plate with central opening by use of
nonlocal elasticity theory. Journal of Computational Applied Mechanics, 51(1), pp.231-
238.
Tacchella, A., Mazzilli, D. and Pietronero, L., 2018. A dynamical systems approach to gross
domestic product forecasting. Nature Physics, 14(8), pp.861-865.
Shkolnikov, V.M., Andreev, E.M., Tursun-Zade, R. and Leon, D.A., 2019. Patterns in the
relationship between life expectancy and gross domestic product in Russia in 2005–15:
a cross-sectional analysis. The Lancet Public Health, 4(4), pp.e181-e188.
Zhu, X., Ma, M., Yang, H. and Ge, W., 2017. Modeling the spatiotemporal dynamics of gross
domestic product in China using extended temporal coverage nighttime light
data. Remote Sensing, 9(6), p.626.
Chang, A.C. and Li, P., 2018. Measurement error in macroeconomic data and economics
research: Data revisions, gross domestic product, and gross domestic income. Economic
Inquiry, 56(3), pp.1846-1869.
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