Is examining the intersection of budget lines and indifference curves a valid means of assessing consumer behavior? Why or why not? How does your analysis of this topic apply to making business decisions?
Indifference curve shows the combinations of goods that give the same level of utility or satisfaction so that the consumer becomes indifferent about the bundle of goods to choose (Kos & Vida, 2011). A budget line shows the budget constraint which measures the limits of income that maximize consumer’s buying behaviour. The intersection of the budget line and the indifference curve gives the equilibrium of the consumer where he achieves the highest indifference curve considering his available income (Földes et al, 2011). This intersection is therefore a valid means of assessing the consumer behaviour because it shows the most feasible point for the consumer where he can achieve the highest level of utility with the available amount of income. Beyond the point intersection, the consumer does not afford the product because he or she has less income than the worth of the combination of goods (Kos & Vida, 2011). Below the point of tangency, the consumer does not achieve maximum utility. This point of tangency between the budget line and the indifference curve therefore gives the consumer the right decision to make when purchasing goods; hence determining his best behaviour.
Analysis of this topic applies to making business decisions because it enables business decision makers to good decisions that involve using the least amount of money to achieve the highest utility (Hands, 2011). In this case, the largest amount of goods is bought using the least amount of income. It enhances economic efficiency when making business decisions which involve acquisition or purchase of products. In other words, it enhances efficient utilization of resources to achieve the highest benefit or returns.
References List
Földes, M.E., Canoy, M., & Langejan, T. (2011). Consumer choice: New developments in the health care sector in Europe. European Journal of Law of the Consumer, 4, 703-802.
Hands, D.W. (2011). Back to the Ordinalist Revolution: Behavioral Economic Concerns in Early Modern Consumer Choice Theory. Metroeconomica, 62(2), 386-410.
