Consumer Choice and Demand

Chapter Objectives:

• Understand constraints of budget lines on consumer choices
• Analyze changes in budget lines due to price or income variations
• Distinguish between total utility and marginal utility
• Explain the law of diminishing marginal utility
• Discuss the utility maximization rule and consumer optimization
• Compare marginal utility per dollar across goods
• Explore reasons for irrational decision-making in predictable ways
• Identify five psychological factors affecting economic decisions

Budget Line:

• Represents combinations of two goods purchasable within a fixed budget and prices.
• Changes in prices or income shift the budget line, affecting consumption choices.
• Example: Increased income shifts line outward, while decreased income shifts it inward.

Utility:

• Total Utility: Overall satisfaction from consuming a quantity of a good.
• Marginal Utility: Additional satisfaction from consuming one more unit; tends to decrease with consumption (diminishing returns).

Utility Maximization Rule:

• Consumers maximize satisfaction by equalizing marginal utility per dollar across all goods.

Demand Curve Relationships:

• Price changes of goods influence optimal combinations purchased; reflected in movements along demand curves.

Behavioral Economics:

• Examines the psychological factors influencing economic decisions:

1. Sunk Cost Fallacy
2. Framing Bias
3. Overconfidence
4. Overvaluing Present vs. Future
5. Altruism

Key Concepts:

• Budget Line
• Marginal Utility Analysis
• Total Utility
• Law of Diminishing Marginal Utility
• Utility-Maximizing Rule
• Behavioral Economics

Indifference Curves:

• Illustrate combinations of goods providing equal satisfaction.
• Curves further from the origin indicate greater satisfaction.

Consumer Choices:

• Optimal choice occurs at highest indifference curve tangent to budget line, maximizing satisfaction given budget constraints.