How do individuals decide that what to consume or produce? How they decide that this choice is optimal?

Answer 1

You think your choice is optimal because you purchased it.

This is true for everything except spur of the moment purchases that I run home and try to hide from my fiance, because she will immediately lower my utility if she found out that I wasted money on it.

Answer 2

This is meant to be an economics queston, so you are thinking that each individual is optimal. But in fact, economics is making the assuming the the result of many individual choices approaches the optimal.

For example, if I start a shop selling icecream, in the middle of winter, I don't sell a lot....so I go out of business. I don't have to decide to stop selling, I just run out of money.

Obviously I am stupid and not optimal, so society is moved away from the optimal. But as my business didn't last long, while the summer icecream sellers make a lot of money, society is still approaching the optimal.

Answer 3

This is a pure microeconomics question. First of all, you have to assume that every individual is a utility maximizer and a rational decision maker. This is a model human being and it is called "Homo Economicus".
Then you assume that every given individual has a indifference map, that is a map of indifference curves. These indifference curves show different bundles of goods, each measured as to quantity, to which a consumer is indifferent. That is, at each point on the curve, the consumer has no preference for one bundle over another. These curves are in the first quadrant, downward sloping, convex, and one curve cannot cross the other.
The other thing you should know is the budget constraint. This is basically a first-degree equation where x and y are two goods, px and py are the prices of those goods, and w is your wealth. When optimizing your choice, you select a point where W = x*Px + y*Py.
Your optimal point of consumption is hence when the budget constraint is tangent to your corresponding indifference curve. That is, the slope of the budget constraint should be equal to the slope of the indifference curve. i.e., the ratio of marginal utility of good x (the utility you get from an additional unit of x) to marginal utility of good y should be equal to the price ratio of those goods.

Answer 4

The technical answer here involves a discussion of utility.

When you buy something, if you are truly rational, you gain a certain amount of utility from your purchase. Thus you try to make your purchasing decisions so that you gain the most total utility.

This is a very complex topic with entire chapters and books written on it so I can't give you a full answer here, but above is the simplest answer: the optimal choice is the one such that they are getting the most total utility from their purchases.

Some topics to look up if you want to know more (wikipedia should have some good info on these):
Utility
Marginal Utility
Law of Diminishing Returns

Answer 5

It's called "the democracy of the marketplace". Wether you realize it or not, you are casting your "vote" every day when you decide to buy this or that product or service, and not some other. This is all decided on an individual level - how you decide that the daily choices you make on what to consume or produce is based on your own individual situation and your own personal values, what you personally consider important to you. Recognition of this reality is the basis of capitalism. Your consumption is based on what you value in products and services, what you produce depends on what you as an individual can get out of it to enhance your own life by producing and selling it. Everyone benefits by everyone acting in their own self interest.

Most societies who have capitalism do not have pure capitalism - they are mixed economies where there is some overall planning done, and laws are in place to prevent some from taking unfair advantage of others because of unequal access to resources or information ("insider trading" laws are an example of this)

Answer 6

You are an individual, right? How do you go about making your consumption decisions? How do you decide what types of goods to buy? How do you decide which particular brand to buy? Do you think you are making the best decisions?

Answer 7

Thats whats referred to as "application". application, for primary products and amenities, is extra often than not the optimum function of cost, volume and high quality that delivers each and each guy or woman optimum happiness. Economics relies upon upon the thought each and each customer needless to say makes the main reasonable determination for themselves. each and every guy or woman of direction comes to a decision their very own optimum determination, besides the shown fact that it many times comes right down to a pair blend of those factors.