Microeconomics: Cardinal and Ordinal Approach to Consumer Equilibrium

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).