Question

What is The Buyer’s Problem and how we solve it?

Answer 1

A buyer or consumer faces the problem while making choices among various alternatives of goods and services.

A buyer's problem is related with the behavior of buyer faced with the resource constraints, in the market while demanding goods and services in order to maximise satisfaction.

A consumer faces the problem of taste and preferences, price of goods and services, budget constraints and budget set or in other words,how much he have to spend to get maximum satisfaction in given income constraint.This is called consumer behavior.

To solve this problem, economists develop various theories so that consumer behavior and choices that consumers make in order to maximize their satisfaction. These theories includes Cardinal utility analysis, revealed preference theories and indifference curve analysis.

In order to solve the buyer's problem with these theories, first we have to understand the term utility,so that a consumer can be rational and able to solve his problem.

Utility is defined as the want satisfying power of a good or service.Utility differs from individual to individual. It depends on the rationale of a consumer. Utility keeps on changing with the consumption of goods and services.

Now ,let's understand the Cardinal Utility Approach/Theory:

This theory states that a consumer derives utility can be measured in Cardinal numbers i.e. 1,2,3,4 etc.

A consumer derives utility from a good can be vary from the utility derived from another good.This can be measured in 3 terms:-

Total utility (TU)

Average utility (AU)

Marginal utility (MU)

Economists who found the theory of Cardinal utility analysis ,divided it into 2 laws:

Law of diminishing marginal utility

Law of equi marginal utility.

Law of diminishing marginal utility states that other things being equal, marginal utility of a good starts falling as an individual consumes more of units in a particular given time period.

Law of equi marginal utility explains the consumer demand behavior when he faces the situation of limited income but he wants to spend on various goods he wants to consume. This laws states the way how a consumer maximise his utility with spending his limited income on alternatives.

There is one more approach,Indifference curve approach.In this approach consumer's preferences are in ordered or in ranked form in relation to each other.This approach studies the consumer behavior in three steps :

Consumer preferences

Budget constraint

Consumer choices

•Consumer preference refers to the indifference curve that is a locus of various combinations of two different commodities that provides equal satisfaction. Consumer is indifferent towards that combinations.

• Budget constraints is the problem a consumer faces with his limited income and he has to restrict his purchases. A budget line shows all combinations a consumer can buy with his limited money at their given prices.

•Consumer choices or consumer equilibrium,it shows the equilibrium when a consumer buy such combination of goods that gives him maximum satisfaction and there is no need to rearrange his purchases of goods.Indifference curve or indifference map shows all the combinations where a consumer is rational and derives maximum satisfaction.

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