Question

How equilibrium of the consumer is based under marshallion theory?

Answer 1

From time to time, different theories have been advanced to explain consumer’s demand for a good and to derive a valid demand theorem.

Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumer’s demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded of a product.

Introduction

The price of a product depends upon the demand for and the supply of it. In this part of the book we are concerned with the theory of consumer’s behaviour, which explains his demand for a good and the factors determining it. Individual’s demand for a product depends upon price of the product, income of the individual, the prices of related goods.

It can be put in the following functional form:

Dx= f(Px, I, Py, P2, T etc.)

where Dx stands for the demand of good X, Px for price of good X, I for individual’s income, Py Pz for the prices of related goods and T for tastes and preferences of the individual. But among these determinants of demand, economists single out price of the good in question as the most important factor governing the demand for it. Indeed, the function of a theory of consumer’s behaviour is to establish a relationship between quantity demanded of a good and its own price and to provide an explanation for it.