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Microeconomic Theory Consumer theory is an economic theory explaining the relationship between consumers’ purchasing choices and income and it involves preferences, indifference curves, and budget constraints (Levin & Milgrom 2004, pp…
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Download file to see previous pages... 1-12). On the other hand, consumers will purchase expensive products whenever their income goes up and less expensive products when the income reduces. It is apparent that consumers normally make various choices with an aim of maximizing benefits they receive in return for the money they spend and the theory posits that consumers spend only the money they have without accounting for saved money as this writing explains. Dean (2009, p. 25-42) explains that the level of satisfaction that a consumer obtains from purchasing various products is based on utility function whose arguments affect consumer’s overall satisfaction level. There are trade-offs faced by the consumers while making consumption decisions and these can be explained with utility function. Diminishing marginal utility describes consumer’s preferences in a very significant way making some economic analysis to take it as a basic starting point. According to Levin & Milgrom (2004, pp. 5-15), consumer theory illustrates that a consumer prefers a group of products packaged together called bundle and that a consumer would prefer a bundle and disregard the brand. The theory explains that consumers would rather base their purchase decision on the number of products in the bundle or the size of the bundle but not the product’s brand. Sassatelli (2007, pp. ...
n bundle, if consumers decide to give up on one good, they would add more of another substitute as a way of maintaining their level of utility (Sassatelli 2007, pp. 57-60). Consumers normally substitute products for others even if the two goods are not the same and this describes most people’s preferences. Slope of an indifference curve shows the maximum number of units of a particular good a consumer is willing to substitute to acquire one unit of the other thus providing an economic way of understanding what the indifference curve really show. It is also worth noting that the slope of an indifference curve depends on the consumption bundle considered. The slope of an indifference curve represents the marginal rate of substitution between two products (Sirgy 1982, pp. 287-300). Summary of Simon Herbert Article Simon attempts to explain the link between psychology and economics by resting on a notion of economics as a science and a discipline (Simon 1959, pp. 253-260). He explains that economics as a science can be used in describing and predicting the behavior of various kinds of consumers and entrepreneurs. His research endeavor intended to understand the processes that participate in human decision making although despite his effort to investigate the issue he did not have a huge impact in the decision making (Zalega 2012, pp. 77-99). He rejected the assumption of perfect rationality made in the mainstream economics and he further emphasized the limitations of the cognitive processes. Simon (1959, pp. 255-265) points out that economics is widely preoccupied by normative economics while descriptive macroeconomics offers the scientific base for policy prescription. He explains how the theory of consumer demand was derived from indifference curve and considering of ...Download file to see next pagesRead More
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Microeconomic theory
When the different bundles or quantities of two different goods that yield same utility are represented in a graph form, it is known as an indifference map for consumers. The reason why it is called indifference curve is because, the combinations of two different goods are yielding same level of utility and hence consumers are indifferent or do not care about the consumption of these different bundles of goods in different quantities.
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