Consumer choice

Report



level of happiness or satisfaction associated with
alternative choices
a term referring to the satisfaction received by a
consumer from consuming a good or service
utility maximization
◦ The doctrine of utilitarianism saw the maximization of
utility as a criterion for the organization of society.
According to utilitarians, such as Jeremy Bentham (1748–
1832) and John Stuart Mill (1806–1873), society should
aim to maximize the total utility of individuals, aiming
for "the greatest happiness for the greatest number of
people".


total utility (TU) - the level of happiness
derived from consuming the good
marginal utility (MU) - the additional utility
that is received when an additional unit of a
good is consumed
# of bananas
0
total utility
0
marginal utility
-
1
70
70
2
110
40
3
130
20
4
140
10
5
145
5
6
140
-5


law of diminishing marginal utility marginal utility declines as more of a
particular good is consumed in a given time
period, ceteris paribus
even though marginal utility declines, total
utility still increases as long as marginal
utility is positive. Total utility will decline
only if marginal utility is negative.


As noted by Adam Smith, water is essential
for life and has a low market price (often a
price of zero) while diamonds are not as
essential yet have a very high market price.
Smith’s explanation: “value in use” vs. “value
in exchange”


value in use = total utility
value in exchange is related to marginal
utility
1.
2. All income is spent.
The first condition listed above is sometimes referred to
as the "equimarginal principle."


Individuals buy an item only if they receive a
net gain from the purchase (i.e., total benefit
exceeds opportunity cost).
This net gain is called “consumer surplus.”

Suppose that an individual buys 10 units
of a good when the price is $5
• Benefit = blue + green rectangles (=$9)
• Cost = green rectangle (=$5)
• Consumer surplus = blue rectangle (=$4)


Indifference curve – a graph of all of the
combinations of goods that provide a given level of
utility
Any two points on an indifference curve provide the
same level of utility
• the point on the budget line that maximizes a consumer's total utility
• the tangency of the budget line and an indifference curve
MU
Px
x

MU
Py
y



www.oswego.edu/~kane/eco101.htm
Czarny B. Podstawy ekonomii
en.wikipedia.org/wiki/Utility

similar documents