Utility and Consumption:
Utility: of a consumer is a measure of the satisfaction the consumer derives from consumption
of the goods and services.
- Utils: measure of utility.
Consumption bundle: is the collection of all the goods and services consumed by that
Utility function: gives the total utility generated by his or her consumption bundle. (Relationship
between individual’s consumption bundle and total amount of utility it generates for that
- When people consume, they take into account their preferences and tastes in a more or
less rational way. Chapter 10
Marginal utility: of a good or service is the change in total utility generated by consuming one
additional unit of that good or service. (the change in total utility from consuming one additional
Marginal utility curve: Shows how marginal utility depends on the quantity of a good or service
consumed. (constructed by plotting points at the midpoint of the unit interval).
- Downwards: each successive clam adds less to total utility than the previous clam.
o Not all marginal utility curve slope downwards, but generally accepted that they
do, and consumption of most goods or services is subject to diminishing
Budgets and Optimal Consumption: Chapter 10
Expenditure on good 1 + Expenditure on good 2 ≤ Total income
Budget constraint: requires that the cost of a consumer’s consumption bundle be no more
than the consumer’s income.
Consumption possibilities: the set of all consumption bundles that can be consumed given
the consumer’s income and prevailing prices.
Budget line: shows the consumption bundles available to a consumer who spends all of his or
Optimal Consumption Bundle: the consumption bundle that maximizes the consumer’s total
utility given his or her budget constraint.
- Graph below: since he has a limited budget, he must make a trade-off: the more pounds
of clams he consumes, the fewer pounds of potatoes, vice versa. He must choose a
point on his budget line. Chapter 10 Chapter 10
Marginal Utility per Dollar: spent on a good or service is the additional utility from spending
one more dollar on that good or service.
How to calculate marginal utility per dollar: Chapter 10
Utility Maximizing principle of marginal analysis: the marginal utility per dollar spent mus