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Published on October 29, 2018 15 min
Other Talks in the Series: Introduction to Microeconomics
Hi! My name is Dr. Sangaralingam Ramesh. In this talk, we're going to be looking at Consumer Optimisation and seeking to answer the question, "How do consumers optimize their behavior?"
So, in the case of analyzing consumer optimisation, we, as economists, use tools such as indifference curves, the budget constraint, and optimisation. Indifference curves represent different combinations of quantities, of bundles of two different goods, which give the consumer the same level of satisfaction or the same level of utility. The budget constraint represents a consumer's income, and optimisation occurs when consumers are able to reach the highest indifference curve possible, for their given level of income.
So, in the case of indifference curves, we need to understand certain properties of indifference curves. Firstly, higher indifference curves are preferred to lower ones. Secondly, indifference curves are sloping downwards. In other words, as more of one good is consumed, there must be less consumption of another good. Thirdly, indifference curves do not cross because this contradicts the principle that 'more is preferred to less'. This can be seen from the diagram where we consider the case of a consumer who likes eating fried chicken and, also, drinking Pepsi. So, we have two indifference curves, which are intersecting at point B. So, what we see here, is that there is a contradiction of 'more is preferred to less'. In other words, high indifference curves give a high level of satisfaction. So, point C on the first indifferent curve, should represent a higher level of satisfaction. But, because the curves intersect at point B, it means that the consumer will derive the same level of satisfaction at point A and point C. So, therefore, this contradicts the principle that 'more is preferred to less'. And fourthly, indifference curves are bowed inwards. In other words, consumers give up goods which they have more in exchange for goods which they have less of.