First, we need to know what utility is. Utility is the ability of goods to satisfy people's desires, and it can also be said that people are satisfied with goods, and it is a psychological index for people to evaluate the satisfaction of goods. Utility evaluation methods include cardinal utility theory and ordinal utility theory.
Cardinal utility is the quantification of utility, and the size of utility has a specific value. Marginal utility analysis method is used to analyze the changing law of consumer utility. It is concluded that the equilibrium condition of maximizing consumer utility is that the marginal utility of various commodities purchased by consumers is equal to the ratio of commodity prices, which is called consumer equilibrium.
Ordinal utility theorists believe that utility can not be accurately measured by numerical values, but can only compare consumers' preferences. It uses indifference curve to indicate the level and order of utility, and budget line to indicate the cost combination of different goods purchased by consumers. A given budget line is bound to have an indifference curve tangent to it, and this tangent point is consumer equilibrium. The condition of equilibrium is that the marginal substitution rate of two commodities is equal to the price ratio. The concepts and analysis methods of cardinal utility theory and ordinal utility theory are introduced in detail below.
First, the cardinal utility theory-marginal utility analysis method
1, law of diminishing marginal utility
In western economics, marginal analysis is one of the most basic analysis methods, and the concept of "marginal" is the most important basic concept, so let's explain what the concept of "marginal" is first. The general meaning of marginal quantity is the change of dependent variable caused by the change of independent variable of a unit, that is, the ratio of the change of dependent variable to the change of independent variable, and the mathematical meaning is the derivative of function.
Marginal utility refers to the utility increment obtained by consumers by increasing the consumption per unit of goods in a certain period of time, in which the independent variable is consumption, the dependent variable is utility, and the variation of the independent variable is the smallest quantity expressed by measurement, which is called a unit, and the variation of the dependent variable is the difference between the final utility and the initial utility, that is, the incremental part.
The law of diminishing marginal utility is that when other conditions remain unchanged, the marginal utility obtained by consumers increasing the quantity of commodity consumption is gradually decreasing, that is, the utility increment obtained by increasing the independent variable according to the unit quantity is decreasing.
Money is also a commodity, and consumers buy goods in exchange for the utility of money. The marginal utility of money is the increment of the utility brought to consumers for every dollar increase, and the marginal utility of money is also decreasing.
Consumer equilibrium refers to the maximum utility that consumers get when they buy different commodities with a certain income, or how consumers allocate their limited income to buy different commodities, and what are the equilibrium conditions to achieve maximum utility? When the income is fixed and the price is known, the condition to achieve equilibrium is that the marginal utility of consumers buying various commodities is equal to the price.
2. How is consumer equilibrium achieved?
We use the method of disproof to illustrate how the balance is achieved. We know that the condition of consumer equilibrium is that the ratio of marginal utility to price of each commodity is equal. Let's take two commodities as examples. We assume that they are not equal, and the ratio of marginal utility to price of commodity 1 is greater than that of commodity 2. Under this condition, the marginal utility brought by the same dollar when buying commodity 1 is greater than that of commodity 2, and consumers will increase their purchases of commodity 1 and decrease their purchases of commodity 2. According to the law of diminishing marginal utility, we know that the marginal utility obtained by increasing the purchase amount of commodity 1 is gradually decreasing, while decreasing the purchase amount of commodity 2 makes the marginal utility of commodity 2 increase gradually, and finally makes the purchase amount of commodity 1 and commodity 2 reach an equilibrium condition, that is, the ratio of marginal utility to price of commodity 1 is equal to that of commodity 2.
Suppose that the ratio of marginal utility to price of commodity 1 is less than that of commodity 2. At this time, the marginal utility of the same dollar to buy goods 1 is less than that of goods 2, and consumers will reduce the quantity of goods 1 and increase the quantity of goods 2. Because the decrease of sufficient quantity of commodity 1 leads to the decrease of marginal utility of commodity 1 less than the increase of commodity 2, the total utility increases. Under the law of diminishing marginal utility, the marginal utility of commodity 1 will increase with the decrease of the purchase quantity of commodity 1, and the marginal utility of commodity 2 will decrease with the increase of the purchase quantity.
Why does it achieve consumer equilibrium? This is because the law of diminishing marginal utility is at work. When the income is fixed and the price is known, the diminishing marginal utility makes the marginal utility of different commodities change inversely with the change of consumption quantity, thus forming an equilibrium condition.
There are many examples of diminishing marginal utility in real life. Repeated consumption of the same commodity will lead to diminishing marginal utility. For example, the satisfaction of eating the first lobster is the greatest, and the marginal utility is also the greatest at this time. The marginal utility of eating the second, third and subsequent lobster is decreasing.
To sum up the marginal utility analysis method: in the analysis of consumer behavior by cardinal utility theorists, the demand curve of a single consumer is derived by using the law of diminishing marginal utility and the equilibrium condition of maximizing consumer utility, and the reason why the demand curve inclines to the lower right is explained. Every point on the curve is a combination of price and demand that meets the maximum utility.
Second, ordinal utility theory-marginal substitution rate analysis method
? Ordinal utility theorists believe that utility can not be accurately measured by numerical values, but can only compare consumers' preferences. For example, for the combination of A and B, if consumers prefer A to B, it can be said that the utility level of A combination is greater than that of B combination.
1, law of diminishing marginal substitution rate
? Ordinal utility theory uses indifference curve to express utility preference degree, which is a combination of different quantities of two commodities with the same preference degree, or a combination of different quantities that can bring consumers the same level of utility or satisfaction.
? The marginal substitution rate of commodities is the consumption of another commodity that needs to be abandoned when increasing the consumption of one unit of commodities under the premise of keeping the total utility unchanged.
? The law of diminishing marginal substitution rate of commodities is that the consumption quantity of another commodity that consumers need to give up when they continuously increase the consumption of one unit is decreasing while maintaining the total utility.
Budget line is the combination of different commodities and different quantities that consumers can buy with all their income under the condition of fixed income and price.
Consumer equilibrium is a state in which indifference curve and budget line are tangent at equilibrium point. The condition of consumer equilibrium is that the marginal substitution rate of goods is equal to the ratio of commodity prices.
Changes in the price of a commodity will cause changes in the demand for this commodity, which can be divided into two parts: substitution effect and income effect.
Substitution effect is the change of demand caused by the change of relative price of goods. Substitution effect and price change in the opposite direction, and substitution effect does not change the utility level. Substitution effect and price change in the opposite direction of normal goods and low-grade goods. If the price of commodity 1 drops, and the price of commodity 1 becomes cheaper than that of commodity 2, consumers will increase the purchase quantity of commodity 1 and decrease the purchase quantity of commodity 2.
Then look at the income effect. For example, the price of commodity 1 has dropped. Although the monetary income has not changed, the purchasing power of money has increased now, which is equivalent to the improvement of the actual income level. Consumers will change the purchase quantity of two commodities, thus reaching a new level of utility. The income effect and price of normal commodities change in the opposite direction, while the income effect and price of low-grade commodities change in the same direction.
2. How do ordinal theorists explain consumer equilibrium?
Ordinal theorists combine indifference curve with budget line to explain consumer equilibrium, and a given budget line must have an indifference curve tangent to it, which is consumer equilibrium. Assuming that the indifference curve is a combination of commodity 1 and commodity 2, the condition of consumer equilibrium is that the marginal substitution rate of commodity 1 to commodity 2 is equal to the ratio of the price of commodity 1 to the price of commodity 2.
What is the economic significance of this equilibrium condition? Or, why can consumers get the greatest satisfaction when the above equilibrium conditions are established? We analyze it from two aspects:
On the one hand, when the marginal substitution rate is greater than the price ratio, for the same dollar, the purchase of one unit of goods is reduced by 2, and the quantity of purchased goods 1 is increased by less than 1, which is equivalent to saving costs for consumers under the condition of constant total utility. Therefore, rational consumers will replace commodity 2 with commodity 1 and increase the purchase amount of commodity 1. This is the junction point, which will run from the upper left to the lower right to reach the equilibrium point.
On the other hand, when the marginal substitution rate is less than the price ratio, for the same dollar, the purchase of one unit of commodity 2 will decrease, and the increased purchase of commodity 1 will be greater than 1, which is equivalent to the increase of consumer cost under the condition of constant total utility. Therefore, rational consumers will replace commodity 1 with commodity 2, increase the purchase of commodity 2 and reduce commodity 65438.
Why can this theory be used to explain consumer equilibrium? The reason is that the law of diminishing marginal substitution rate is at work, and the reason of diminishing marginal substitution rate is that the arrangement of consumers decreases with the increase of the number of purchased goods.
1845 Historically, there was a famine in Ireland. The price of potatoes has gone up, but the demand for potatoes has actually increased. This phenomenon was discovered by Ji Fen, an Englishman. Microeconomics calls this phenomenon "Ji Fen problem", and this special commodity whose demand and price change in the same direction is called "Giffen commodity". What is the cause of the "Ji Fen problem"? The reason is that the good income effect in Ji Fen is greater than the substitution effect, which makes the demand and price change in the same direction.
In Ireland in the middle of19th century, the consumption expenditure of buying potatoes accounted for a large proportion of the income of most poor families. When the price of potatoes rises, the real income of poor families drops relatively sharply. In this case, poor people have to increase the purchase of inferior potatoes in large quantities, so that the income effect exceeds the substitution effect, thus resulting in a special phenomenon that the demand for potatoes increases with the price increase.
To sum up the marginal substitution rate analysis method: the evaluation of ordinal utility is mainly to evaluate consumers' preferences, thus summarizing the law of diminishing marginal substitution rate. When analyzing the conditions of consumer equilibrium, the budget line and indifference curve are used, and it is concluded that the equilibrium condition is the tangent point of the budget line and indifference curve, and the marginal substitution rate at this time is equal to the ratio of the prices of two commodities.