Analyzing Consumer Expenditure: A Microeconomic Equation Approach

This assignment focuses on developing and analyzing a consumer expenditure equation within a microeconomic framework. The student introduces an equation representing a person's expenditure, incorporating necessities, leisure goods, and savings, and prices for necessities and leisure goods. The equation is rooted in the concept of the budget line constraint. The assignment then provides two scenarios demonstrating how the equation can be applied to calculate a person's expenditure and determine how much of a good they can purchase given a budget. The importance of equations in the business world is highlighted, particularly in accounting and finance for balance sheets and profit calculations. The student emphasizes the significance of mathematical tools in business and references software that uses formulas and equations. The assignment concludes by reiterating the importance of these tools for all stakeholders in the economy.

Student’s Name
Equations in Business
Institutional Affiliation

Introduction
In the real business world, equations are important in the daily activities and evaluation
of businesses. In this assignment, I will develop an equation that briefly describes a consumer’s
expenditure. This equation borrows from the micro-economic budget line constraint, a principle
under the theory of the consumer (Wetzstein, 2013). The equation is linear and is as follows:
E=∑ xN +∑ yL+ S
In this equation, E represents a person’s expenditure. N represents the quantity of
necessities that a person buys at a particular time. L is the quantity of leisure goods that a
person buys/consumes within a particular period. S represents the amount of money that a
person saves over a given period. Lastly, x and y are the unit prices of necessities and leisure
goods respectively. In general the summations of xN and yL show the total expenditure on
necessities and leisure goods respectively. Summation sign means that a person consumes a
number of necessities as well as Veblen goods, and not just one of each.
This equation shows how a person spends his/her income assuming that the consumer
is rational. The concept of consuming and saving is borrowed from the economic theories of
consumption which argue that a person can either consume or save his/her income at a
particular period. The assumptions from the real microeconomic theories and concepts also
hold for this particular equation that I have developed (Wang, 2018).
Solutions to the equation
In understanding the equation better, we evaluate an example that will be adjusted to fit in two
scenarios as follows:
Scenario one
Assume that John, a social worker, goes to the supermarket and buys the following items: 2kgs
of sugar @$2 per kg, 3 packets of milk @$1 per packet, a chase board game for his children for
$10, deposits $12 in his savings account and fuels his car for $25. In calculating John’s
expenditure, we categorize his expenses depending on the nature of the goods.

∑XN= (2*2) + (3*1) = $7 ∑YL= $10 S=$12
Therefore E= 7+10+12= $39
Scenario two
Assuming that in the above example, John has $50 which he must save $12 and use $20 in
buying necessities, how many liters of fuel can he buy if the price of fuel per liter is $1,
assuming that he must deplete all the money that he has.
E= $50 = $7 + ∑yL+ $12
∑yL= 50-19 = $31 If y= $1 then if follows that L= 31/1 = 31 Liters
In the above scenarios, the answers may change depending on a person’s consumption bundle
and their savings plan.
Equations are widely used in the business world and more so by the accounting and
finance departments. In the books of accounts, and especially in the balance sheet,
mathematical equations are used in ensuring that the books are balanced by the end of a given
trading period. For example, the balance sheet equation A=C+ L is used to ensure that there
is a balance between the assets of a business and its respective liabilities and capital (Needles
et al., 2013).
Secondly, equations are used in economic analysis of a firm. In calculation of the net
profits of a business, the total revenues are compared against the total costs and the difference
gives the profit or loss of a business. For example, assuming that a firm has employed k workers
with each of them paid $10 units, then the profit of the business will be given by the equation
of the formP=total revenue−10 k. Therefore, it is true to say that equations are used in
calculating the profit/loss of a business and other financial ratios.
Conclusion
The significance of mathematical equations, formulas and symbols in the business world is
quite big and therefore, it is important that any person studying or entering into any business

should familiarize themselves with these mathematical tools. The various business and
analytical software such as the SPSS, STATA and Eviews have incorporated mathematical
formulas and equations that have facilitated the overall running of business activities and
entities. It is also worth noting that these formulas and equations are used by the various
stakeholders in the economy including customers, producers and other intermediaries (Fox,
2017).
References

Fox, W. P. (2017). Introduction to mathematical modeling for business analytics. Mathematical
Modeling for Business Analytics, 1-
24. https://doi.org/10.1201/9781315150208-1
Needles, B. E., Powers, M., & Crosson, S. V. (2013). Principles of accounting. Cengage
Learning.
Wang, S. (2018). Microeconomic theory. Springer.
Wetzstein, M. E. (2013). Microeconomic theory: Concepts and connections. Routledge.