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CHAPTER
7
Consumer Choice
1
© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
1
Consumer Behavior

The theory of consumer behavior
explores the decisions made by
individual consumers and makes the
connection between those decisions
and the market demand curve.
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
The Marginal Principle and Individual
Demand

Each point on the
individual demand
curve is the result of a
rational choice by the
consumer.

To determine the
quantity produced at a
given price, the
consumer considers
the benefit and cost of
buying the good.
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
The Individual Demand Curve

The marginal principle can be used to
show how consumers incorporate
benefits and costs into their
consumption decisions.
Marginal PRINCIPLE
Increase the level of an activity if its marginal
benefit exceeds its marginal cost, but reduce the
level if the marginal cost exceeds the marginal
benefit. If possible, pick the level at which the
marginal benefit equals the marginal cost.
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
Total Utility and Marginal Utility



The benefit of consuming a good is called
total utility, and is measured in utils, or
imaginary units of satisfaction.
This benefit is “tested” by the consumer
after each unit has been consumed, or on a
per-unit basis, using the marginal principle.
Marginal utility is the change in total utility
resulting from the consumption of one
additional unit of the good.
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
Total Utility and Marginal Utility

Total utility
increases at a
decreasing rate,
while marginal
utility decreases.
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
Total Utility and Marginal Utility
Marginal Utility and the Marginal Principle
Number
of
burgers
Marginal benefit of
burgers = Marginal
utility of burgers (utils)
Number of
tacos
Marginal
utility of
tacos (utils)
Marginal cost of burgers
= 3 times the marginal
utility of tacos (utils)
5
18
15
1
3
6
16
12
2
6
7
14
9
3
9
8
12
6
4
12
9
10
3
5
15
10
8
0
6
18
Assumptions:
Consumer’s income = $30.00
Price of a burger = $3.00
Price of a taco = $1.00
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
The Marginal Benefit of
Consumption
Marginal Benefit of
Burgers
Number
of
burgers
Marginal benefit of
burgers = Marginal
utility of burgers (utils)
5
18
6
16
7
14
8
12
9
10
10
8
8
© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
Finding the Marginal Cost of
Consumption





Five burgers cost $15, leaving $15 to
spend on tacos, or 15 tacos.
The marginal utility of 15 tacos is one util.
Given the price of burgers and tacos,
there is a tradeoff of 3 tacos per burger.
Marginal cost of a burger = marginal
utility of tacos x tradeoff between burgers
and tacos.
Marginal cost of fifth burger = 1 util per
taco x 3 tacos per burger
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
The Marginal Cost of Consumption
The Marginal Cost of Burgers
Number
of
burgers
Number
of tacos
Marginal
utility of
tacos
(utils)
Marginal cost of
burgers = 3 times
the marginal utility
of tacos (utils)
5
15
1
3
6
12
2
6
7
9
3
9
8
6
4
12
9
3
5
15
10
0
6
18
10
© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
Finding a Point on the Demand
Curve
Marginal
benefit
Quantity (utils)
5
18
6
16
7
14
8
12


A point on the demand
curve: at a price of $3, the
quantity of burgers demanded
equals 8.
© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e

Marginal
cost
(utils)
3
6
9
12
Marginal benefit
equals marginal cost
when 8 burgers are
consumed.
The marginal principle
is satisfied at point
11 m.
O’Sullivan & Sheffrin
Finding a Point on the Demand
Curve

The marginal principle is satisfied at point m, which
demonstrates why at a price of $3, the quantity of
burgers demanded equals 8 (a point on the demand
curve).
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin
The Utility-maximizing Rule

The consumer maximizes utility by
picking the affordable combination of
consumer goods that makes the marginal
utility per dollar spent on each good
equal to that of a second good:
marginal utility of burgers marginal utility of tacos

price of burgers
price of tacos
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© 2001 Prentice Hall Business Publishing
Economics: Principles and Tools, 2/e
O’Sullivan & Sheffrin