Overview
This lecture introduces the concept of consumer choice, focusing on how consumers decide what to purchase based on their budget, preferences, and the concept of utility.
Introduction to Consumer Choice
- Consumer choice examines how individuals decide what to buy within their income limits.
- The main model used in this chapter is the budget constraint and opportunity set.
- The focus is on maximizing utility with a given budget, not on changes in income or price or labor-leisure choices.
Budget Constraint and Opportunity Set
- Budget constraint: the combinations of goods a consumer can afford given their income and the prices of goods.
- Opportunity set: all possible combinations of goods within the consumer's budget.
- Example: If income is $56, t-shirts cost $14, and movies cost $7, a consumer can buy up to 4 t-shirts or 8 movies.
Utility and Consumer Choice
- Utility measures satisfaction or happiness from consuming goods or services.
- Consumers aim to maximize total utility when choosing a consumption bundle.
- Utility is measured in 'utils,' a hypothetical unit of satisfaction.
Key Assumptions and Use of Utility
- Utility is subjective and can only compare preferences within the same person, not across different people.
- Consumers are assumed to know how much utility each option gives them.
Marginal Utility and Diminishing Returns
- Marginal utility: the additional satisfaction from consuming one more unit of a good.
- Law of diminishing marginal utility: each additional unit of the same good provides less extra satisfaction than the previous one.
- Negative marginal utility occurs if consuming more actually reduces total satisfaction.
Applying the Utility Model
- To evaluate bundles, sum the utility from each good in the bundle.
- The best choice is the bundle that gives the highest total utility within the budget constraint.
- Example: Out of several bundles, the one with six movies and one t-shirt provides the most utility for the consumer.
Key Terms & Definitions
- Budget Constraint — the limited combinations of goods a consumer can purchase with a fixed income.
- Opportunity Set — all affordable combinations of goods and services for a consumer.
- Utility — the satisfaction or happiness gained from consuming goods or services.
- Utils — units used to measure utility.
- Marginal Utility — the extra utility from consuming one additional unit of a good.
- Law of Diminishing Marginal Utility — the principle that marginal utility decreases as more of a good is consumed.
Action Items / Next Steps
- Read the relevant textbook sections on how income and price changes affect consumer choices.
- Prepare for the next lecture, which will continue with additional examples.