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9.2: Introduction to Utility and Consumer Equilibrium

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  • What you’ll learn to do: describe the concept of utility and explain how consumers spend in order to maximize utility

    This is a photograph of students at their outdoor college graduation ceremony.
    Figure 1. Investment Choices. Higher education is generally viewed as a good investment, if one can afford it, regardless of the state of the economy. (Credit: modification of work by Jason Bache/Flickr Creative Commons)

    Microeconomics seeks to understand the behavior of individual economic agents such as individuals and businesses. Economists believe that we can analyze individuals’ decisions, such as what goods and services to buy, as choices we make within certain budget constraints. Generally, consumers are trying to get the most for their limited budget. In economic terms they are trying to maximize total utility, or satisfaction, given their budget constraint.

    Everyone has their own personal tastes and preferences. The French say: Chacun à son goût, or “Each to his own taste.” An old Latin saying states, De gustibus non est disputandum or “There’s no disputing about taste.” If people base their decisions on their own tastes and personal preferences, however, then how can economists hope to analyze the choices consumers make?

    An economic explanation for why people make different choices begins with accepting the proverbial wisdom that tastes are a matter of personal preference. However, economists also believe that the choices people make are influenced by their incomes, by the prices of goods and services they consume, and by factors like where they live.

    This section introduces the economic theory of how consumers make choices about what goods and services to buy with their limited income. If we assume that consumers wish to maximize their utility, while staying within their budget, we can describe the combination of goods and services they select to do that as their consumer equilibrium. If you look at Facebook for five fewer minutes a day, will you really be more productive? Is it worth it to clock into work ten minutes early, or would it be best to spend that time with your significant other? Is it worth it to spend five dollars on a dessert when you already feel a little bit full? In the next section, you will examine choices made at the margin, or the decisions you make to do a little more or a little less of something.

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    • Modification, adaptation, and original content. Authored by: Steven Greenlaw and Lumen Learning. License: CC BY: Attribution
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