What are the two approachs of consumer demand analysis? Explain in details?
Answers
Rationality:
Implies that a consumer is a rational being and aims at maximizing the total satisfaction given the income and prices of goods and services.
ii. Ordinal Utility:
Assumes that utility is expressible only in ordinal terms. This implies that a consumer is only able to express his/her preference for goods.iii. Transitivity and Consistency of Choice:
Implies that consumer choices are assumed to be transitive and consistent. The transitivity of choice means that if a consumer prefers A to B and B to C, he/she would prefer A to C. On the other hand, the consistency of choice means that if a consumer prefers A to B in one period, he or she cannot prefer B to A in another period.
iv. Non-satiety:
Implies that a consumer is assumed to be non-satisfied. In other words, it is assumed that consumer does not reach the level of satisfaction by consuming a good and always prefers a large quantity of goods.
v. Diminishing Marginal Rate of Substitution:
Acts as an important concept in indifference curve analysis. Marginal rate of substitution implies the rate at which a consumer is willing to substitute one good (X) for another good (Y), so that the total satisfaction remains the same.