Chapter 7 Utility Maximization

Utility

(Utility is want-satisfying power.) the satisfaction one gets from consuming a good or service Not the same as usefulness Subjective Difficult to quantify

Utility-maximizing Rule marginal utility-to-price ratios

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If a rational consumer is in equilibrium, which of the following conditions will hold true?

<MUa = MUb = MUc = . . . = MUn. <The marginal utility of each good purchased will be zero. <The marginal utility of the last dollar spent on each good purchased will be the same. <The total utility obtained from each good purchased will be the same.

Law of diminishing marginal utility

As consumption of a good or service increases, the marginal utility obtained from each additional unit of a good or service decreases Explains downward sloping demand curve

Rational behavior

Consumers want to get "the most for their money" or, technically, to maximize their total utility.

Utility-Maximizing

To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility.

MU/Price

Utils or Amount of Bang for your Buck

Consumer Equilibrium

When the consumer has "balanced his margins" or balances his satification

Budget Constraints

consumer has a limited number of dollars, he or she cannot buy everything wanted.

The theory of consumer behavior assumes that:

consumers behave rationally, attempting to maximize their satisfaction.

diminishing marginal utility

that added satisfaction declines as a consumer acquires additional units of a given product.

Marginal utility

the extra satisfaction from an additional unit of the good. marginal utility is the change in total utility that results from the consumption of 1 more unit of an item.

substitution effect

the impact that a change in a product's price has on its relative expensiveness and consequently on the quantity demanded.

income effect

the impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good.

Total utility

the total amount of satisfaction

utils

units of utility These imaginary units of satisfaction are convenient for quantifying consumer behavior for explanatory purposes.