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CHAPTER 10
The Rational Consumer
PowerPoint® Slides
by Can Erbil
© 2004 Worth Publishers, all rights reserved
What you will learn in this chapter:
How to spend income on goods and services?
Why maximizing utility?
Why the principle of diminishing marginal
utility applies to the consumption of most goods and
services?
How to use marginal analysis to find the
optimal consumption bundle?
How choices by individual consumers give rise to
the market demand curve
Income and substitution effects
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Utility and Consumption
Utility
Consumption bundle
Utility function
Utils
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Cassie’s Total Utility and Marginal Utility
The marginal utility curve slopes downward due to diminishing marginal utility;
each additional clam gives Cassie less utility than the previous clam.
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The Principle of Diminishing Marginal
Utility
Marginal utility
Marginal utility curve
Principle of diminishing marginal utility
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Budgets and Optimal Consumption
Budget constraint
Consumption possibilities
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The Budget Line
The budget line represents all the possible combinations of
quantities of potatoes and clams that Sammy can purchase if he
spends all of his income.
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Changes in Income Shift the Budget Line
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Sammy’s Utility from Clam and Potato
Consumption
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Optimal Consumption Choice
The optimal consumption bundle is the
consumption bundle that maximizes a consumer’s
total utility given his or her budget constraint.
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Sammy’s Budget and Total Utility
Sammy’s total utility is the sum of the utility he gets from clams
and the utility he gets from potatoes.
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Optimal Consumption Bundle
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Spending the Marginal Dollar
The marginal utility per dollar spent on a good
or service is the additional utility from spending
one more dollar on that good or service.
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Sammy’s Marginal Utility per Dollar
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Marginal Utility per Dollar
If Sammy has in fact chosen his optimal consumption bundle, his
marginal utility per dollar spent on clams and potatoes must be
equal.
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Optimal Consumption Rule
The optimal consumption rule:
when a consumer maximizes utility, the marginal
utility per dollar spent must be the same for all
goods and services in the consumption bundle.
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From Utility to the Demand Curve:
Individual and Market Demand
The individual demand curve for a good shows the relationship
between quantity demanded and price for an individual consumer.
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Marginal Utility, the Substitution Effect,
and the Income Effect
The substitution effect
The income effect
Normal Goods
Inferior Goods
Giffen Goods
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The End of Chapter 10
coming attraction:
Chapter 11:
Consumer Preferences
and Consumer Choice
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