Total and marginal utility concept with diagrams

Total and marginal utility

1. Consumer Choices What determines the choices consumers make? Why do individuals buy certain combinations of goods and services? Consumer choice theory analyzes how people decide what to consume given limited income and varying prices. The goal: maximize satisfaction (utility) within a budget constraint.

2. Bring It Home: The Case of Economic Downturns During Recessions When economic times are tough, spending habits change significantly. Consumer behavior shifts as households adapt to reduced income and economic uncertainty. Question to consider: What do people demand more of during recessions? This question will be revisited as we explore the chapter's concepts. Real-World Application During the Great Recession, people dramatically shifted their spending patterns—illustrating consumer choice principles in action.

3. Learning Objectives of Chapter 6 Maximize Utility Explain how consumers make choices to maximize satisfaction given their constraints. Income & Price Effects Describe how changes in income and prices affect consumption decisions. Substitution vs. Income Distinguish between substitution effects and income effects in consumer behavior. Behavioral Economics Interpret how behavioral economics modifies the standard rational decision-making model.

4. The Core Idea: Scarcity and Choice Limited Resources Consumers face scarcity with limited income and time. They must allocate resources among many competing goods and services. Individual Focus The analysis focuses on individual decision-making, holding everything else constant (ceteris paribus). Rational Behavior Economists assume rational behavior: consumers choose the combination of goods that provides the highest satisfaction possible given their constraints.

5. Understanding Utility What is Utility? Utility represents the satisfaction, happiness, or benefit gained from consuming a good or service. Utility is subjective and varies by person Expressed numerically in "utils" to simplify analysis (not measurable in real life) Consumers seek to maximize total utility , not necessarily minimize spending

6. Total Utility and Marginal Utility 01 Total Utility (TU) Overall satisfaction from all units of a good consumed 02 Marginal Utility (MU) Additional satisfaction gained from consuming one more unit 03 Law of Diminishing Marginal Utility Each additional unit provides less additional satisfaction than the previous one As consumption increases, total utility rises at a decreasing rate—a fundamental principle in consumer choice theory.

7. Example: José's Movie Consumption This table demonstrates how marginal utility declines as José watches more movies: Number of Movies Total Utility (utils) Marginal Utility (utils) — 1 16 16 2 28 12 3 39 11 4 47 8 5 53 6 6 57 4 Key observation: Each additional movie increases José's total utility, but marginal utility falls from 16 → 12 → 11 → 8 → 6 → 4. This pattern perfectly illustrates the law of diminishing marginal utility.

8. Graphical Illustration Total Utility Curve Slopes upward and gradually flattens as consumption increases Marginal Utility Curve Slopes downward, reflecting diminishing satisfaction Optimal Point When MU reaches zero, TU is maximized. Beyond that, more consumption reduces satisfaction

9. Intuitive Examples The Pizza Principle First slice: high satisfaction Second slice: pleasure but slightly less Fourth or fifth slice: satisfaction may decline or even turn negative Universal Application The same logic applies to other goods: Movies and entertainment Coffee and beverages Clothing and accessories Each follows the pattern of diminishing marginal utility.

10. Linking Utility to Consumer Decision-Making Consumers face choices between multiple goods—for example, movies versus T-shirts. Each combination provides a different total utility. 1 Multiple Goods Consumers must choose between various products and services 2 Different Utilities Each combination yields different total satisfaction levels 3 Optimal Choice Rational consumers select the combination that maximizes total utility given their income 4 Budget Constraint This leads to the budget constraint concept (introduced next) Key Takeaways from Section 6.1 Utility represents satisfaction and is central to consumer choice theory Total utility rises as consumption increases, but marginal utility declines due to the law of diminishing marginal utility Consumers allocate spending to maximize total satisfaction within income limits The next step: formalize these choices using budget constraints and the marginal utility per dollar concept Transition to Section 6.2: We now shift from utility theory to how consumers combine goods, exploring budget lines, equilibrium conditions, and adjustments to income and price changes.