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Chapter 6

# Economics 1021A Chapter 6

Department
Economics
Course Code
ECON 1021A/B
Professor
Terry Biggs
Chapter
6

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Economics 1021A Chapter 8 2013-10-19
The choices you make as a buyer of goods and services is influenced by many factors, which economists
summarize as:
Consumption possibilities
Consumption possibilities are all the things that you can afford to buy.
We’ll study the consumption possibilities of Lisa, who buys only two goods: movies and pop.
Consumption possibilities are limited by income, the price of a movie, and the price of pop.
When Lisa spends all of her income, she reaches the limits of her consumption possibilities.
Lisa’s budget line shows the limits of her consumption possibilities.
Some goods are indivisible and must be bought in whole units at the points marked.
Other goods are divisible goods and can be bought in any quantity.
Preferences
The choice that Lisa makes depends on her preferences—her likes and dislikes.
Her benefit or satisfaction from consuming a good or service is called utility.
Total utility is the total benefit a person gets from the consumption of goods. Generally, more
consumption gives more total utility.
Total utility from a good increases as the quantity of the good increases.
Marginal utility from a good is the change in total utility that results from a unit-increase in the
quantity of the good consumed.
As the quantity consumed of a good increases, the marginal utility from it decreases.
We call this decrease in marginal utility as the quantity of the good consumed increases the principle of
diminishing marginal utility.
The key assumption is that the household chooses the consumption possibility that maximizes total utility.
The direct way to find the utility-maximizing choice is to make a table in a spreadsheet and do the
calculations:
Find the just-affordable combinations
Find the total utility for each just-affordable combination
Lisa chooses the combination that gives her the highest total utility.
Consumer equilibrium is the situation in which Lisa has allocated all of her available income in the
way that maximizes her total utility, given the prices of movies and pop.
The utility-maximizing combination is the consumer’s choice