SummaryThis Learning Path is a bit more of a mixed bag than the previous one, finishing off our consumer choice problem, looking at the some useful implications of this in demand theory before moving on to other types of demand theories.
Cost minimisation is a way of solving the optimisation problem regarding the utility function and the budget constraint, even though the most common way of doing this is by means of utility maximisation.
If we think about it, we don’t normally have a fixed budget for most purchases. We have a certain utility we expect to derive from them and we hope to spend as little as possible on them (but we don’t have a maximum budget).
In this case, it is utility that is fixed as a restriction, and cost that we can play around with. It’s like solving the consumer’s choice problem in a mirror image way to utility maximisation, and is associated with Hicksian demand curves.
The way we resolve this minimisation problem is very similar to utility maximisation, and is also done with a Lagrangian system, since there is a duality in consumption. In this case, we want to minimise our budget for a given utility:
Video – Cost minimisation: