SummaryIn this Learning Path we look at consumer behaviour from a theoretical perspective, trying to solve the basic problem we all face every day: how to get as much of what we want or need without blowing our budget.
An individual is therefore faced with the following problem: faced with a set of choices, or baskets of goods, and a fixed budget, how to choose the basket which maximises their utility?
If we know an individual’s utility function, and we know their budget, we have the two restrictions necessary to maximise their utility. This can be done graphically, with the point where budget and utility function meet defining an optimum, as shown in the adjacent figure.
It can be also done mathematically, through a Lagrangian, where the first derivatives determine a system of equations that can be resolved by submitting our utility function to the restriction presented by the budget:
Video – Utility maximisation: