Business, Legal & Accounting Glossary
Economics as a subject deals with optimum allocation of scarce resources. It is essentially a theory of choices under a given set of constraints. Economic models nowadays make use of mathematical constraint optimization techniques for the determination of desired goals. In earlier economic analytical models mostly words or diagrams were preferred tools of analysis, used for determination of economic optimums. There are a host of models of economic optimization, ranging from sophisticated game-theoretic approach to classical models of employment and output quest for determination of ‘optimum’ value of the variable under consideration. In the modern-day world, the optimum use of resources has attained a totally different dimension. The present-day buzzword for the use of resources (mostly nonrenewable ones) is sustainable development. Concept of intergenerational equity has become important in this context. This has brought in interesting connotations for taxation and evaluation of environmental projects. The discipline of environmental economics has developed interdisciplinary models of analysis in this regard. The basic idea here is that, since resources are scarce, societies ought to develop in a sustainable manner so that they do not impose any additional cost burden on their future generations. The discount rate is an important analytical tool used in this kind of analysis.
In this model, consumers are assumed to be total utility maximizers, when they make choice about the quantity of commodities and services to be consumed. In the process of utility maximization, consumers face a host of constraints, two of which are mentioned below.
A solution to a consumer’s constraint optimization problem is referred to as consumer equilibrium.
In a two-commodity world (commodity 1 and commodity 2), consumer’s equilibrium is attained at the following condition:
MU1/P1=MU2/P2
For n commodities, at consumer equilibrium,
MU1/P1=MU2/P2=………MUn/Pn holds
Thus in this model consumer equilibrium is attained when total utility reached is optimum under given constraints.
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This glossary post was last updated: 29th March, 2020 | 0 Views.