Question

2. Compare and contrast consumer theory and producer theory.

Answer 1

Consumer theory is based on the utility function, the utility of a good or service defines the consumption and the demand of that good and service in the market, whereas the producer theory or the production theory is based on the production fuction which compare the output required with the corresponding input. The prime motive of consumer is the maximisation of the utility similarly the prime motive for the production is the profit making. The consumers acheive the maximum utility with a given amount of money whereas the producers maximises their profits by producing a given volume of output.

Now the indifference curve of the consumer tells us about the different levels of utility that the consumer will get and its slope defines the marginal rate of substitution whereas the producers isoquant tells us about the different levels of output and the slope of the isoquants defines the marginal rate of technical substitution.