The Rational Consumer

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• CHAPTER 10
• The Rational Consumer

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What you will learn in this chapter

• How consumers choose to spend their income on
  goods and services
• Why consumers make choices by maximizing
  utility, a measure of satisfaction from
  consumption
• Why the principle of diminishing marginal
  utility applies to the consumption of most goods
  and services
• How to use marginal analysis to find the optimal
  consumption bundle
• How choices by individual consumers give rise to
  the market demand curve

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Utility and Consumption

• The utility of a consumer is a measure of the
  satisfaction the consumer derives from
  consumption of goods and services.
• An individuals consumption bundle is the
  collection of all the goods and services consumed
  by that individual.
• An individuals utility function gives the total
  utility generated by his or her consumption
  bundle. The unit of utility is a util.

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Cassies Total Utility and Marginal Utility
Cassies total utility depends on her consumption
of fried clams. It increases until it reaches
its maximum utility level of 64 utils at 8 clams
consumed and decreases after that.
The marginal utility curve slopes downward due to
diminishing marginal utility each additional
clam gives Cassie less utility than the previous
clam.
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Problem 1 2 p.250
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Budgets and Optimal Consumption

• A budget constraint requires that the cost of a
  consumers consumption bundle be no more than the
  consumers total income.
• A consumers consumption possibilities is the set
  of all consumption bundles that can be consumed
  given the consumers income and prevailing prices.

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The Budget Line
The budget line represents all the possible
combinations of quantities of potatoes and clams
that Sammy can purchase if he spends all of his
income. It is also the boundary between the set
of affordable consumption bundles (the
consumption possibilities) and unaffordable ones.
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Changes in Income Shift the Budget Line
If Sammys income increases from 20 to 32 per
week, he is better off his consumption
possibilities have increased, and his budget line
shifts, from BL1, outward to its new position at
BL2.
If Sammys income decreases from 20 to 12, he
is worse off his consumption possibilities have
decreased and his budget line shifts inward
toward the origin, from BL1 to BL3.
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Sammys Utility from Clam and Potato Consumption
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Optimal Consumption Choice

• The optimal consumption bundle is the consumption
  bundle that maximizes a consumers total utility
  given his or her budget constraint.

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Sammys Budget and Total Utility
Sammys total utility is the sum of the utility
he gets from clams and the utility he gets from
potatoes.
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Optimal Consumption Bundle
Sammys total utility is maximized at bundle C,
where he consumes 2 pounds of clams and 6 pounds
of potatoes. This is Sammys optimal consumption
bundle.
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Spending the Marginal Dollar

• The marginal utility per dollar spent on a good
  or service is the additional utility from
  spending one more dollar on that good or service.

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Sammys Marginal Utility per Dollar
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Marginal Utility per Dollar
If Sammy has in fact chosen his optimal
consumption bundle, his marginal utility per
dollar spent on clams and potatoes must be equal.
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Optimal Consumption Rule

• The optimal consumption rule says that when a
  consumer maximizes utility, the marginal utility
  per dollar spent must be the same for all goods
  and services in the consumption bundle.

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From Utility to the Demand Curve Individual and
Market Demand
The individual demand curve for a good shows the
relationship between quantity demanded and price
for an individual consumer. The quantity
demanded by the market at any given price is the
sum of the quantities demanded by Bert and by
Ernie at that price.
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The End of Chapter 10