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Chapter 6: Consumer Choice and Demand

- Utility is the sense of pleasure, or satisfaction, that comes from consumption

- It is subjective

- It depends on one’s tastes and preferences

- Economists assume simply that tastes are given and are relatively stable–that is, different

people may have different tastes, but an individual’s tastes are not constantly in flux

- Tastes for some products do change over time

- If tastes were not relatively stable, then we could not reasonably make the other-things-

constant assumption required for demand analysis

- Total utility – The total satisfaction you derive from consumption

- Marginal utility – The change in total utility resulting from a one-unit change in consumption

- Law of diminishing marginal utility – The more of a good a person consumes per period, the

smaller the increase in total utility from consuming one more unit, other things constant

- Disutility – When marginal utility is negative

- Diminishing marginal utility is a feature of all consumption

- For some goods, the drop in marginal utility with additional consumption is greater

- Developing numerical values for utility allows us to be more specific about the utility from

consumption

- Each person has a uniquely subjective utility scale

- At any level of consumption, marginal utilities sum to total utility

- If a good is free, you increase consumption as long as marginal utility is positive

- You are in equilibrium when consuming this combination because any affordable change

would reduce your utility

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- Once a consumer is in equilibrium, there is no way to increase utility by reallocating the

budget

- Any change in consumption decreases utility

- In equilibrium, the last dollar spent on each good yields the same marginal utility

- Consumer equilibrium – The condition in which an individual consumer’s budget is spent and

the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized

MUp/Pp = MUv/Pv

- In equilibrium, higher-priced goods must yield more marginal utility than lower-priced

goods–enough additional utility to compensate for their higher price

- Consumers maximize utility by equalizing the marginal utility from the last dollar spent on

each good

- The urge to maximize utility is like the force of gravity–both work whether or not you

understand them

- The value of an item purchased must at least equal the price; otherwise, one wouldn’t buy it

- Marginal valuation – The dollar value of the marginal utility derived from consuming each

additional unit of a good

- Consumer surplus – The difference between the most a consumer would pay for a given

quantity of a good and what the consumer actually pays

- The market demand curve is simply the horizontal sum of the individual demand curves for all

consumers in the market

- The market demand curve shows the total quantity demanded per period by all consumers at

various prices

- At a given price, consumer surplus for the market is the difference between the most consumers

would pay for that quantity and the amount they do pay
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- Consumer surplus is the net benefit consumers get from market exchange

- It can be used to measure economic welfare and to compare the effects of different

market structures, different tax structures, and different public programs

- Because consumption does not occur instantly, time plays a role in demand analysis

- Consumption has a money price and a time price

- Goods are demanded because of the benefits they offer

- One’s willingness to pay a premium for time-saving goods and services depends on the

opportunity cost of one’s time

- Differences in the value of time among consumers help explain differences in

consumption patterns observed in the economy

- Differences in the opportunity cost of time among consumers shape consumption patterns and

add another dimension to our analysis of demand