■ Rational behavior:If the consumer is a rational person who considers costs and benefits before making certain
choices, she will try to use her income to produce the greatest amount of satisfaction. Getting the best “bang for
your buck” is the goal of all consumers. People do not want to feel cheated, and they want to get the most out of
their choices.
■ Tastes and preferences:Self-interest and what appeals to consumers create preferences. Each consumer has his
or her own preferences when it comes to consumption. Some tastes and preferences can be swayed by marketing;
however, individuals ultimately make their decisions based on what appeals to them. Marginal utility plays a large
role in preferences because it allows consumers to gauge the satisfaction a product brings to them.
■ Budget considerations:Consumers sometimes have fixed amounts of income that limit their ability to consume
goods and services. This limitation makes people choose between products. Although budget limitations are less
severe for millionaires than they are for an average household, individuals, no matter what the income, are limited
by a budget.
■ Prices:Setting prices creates an allocative method for goods and services in our economy. Prices force con-
sumers to choose between products, creating substitutes and complements along the way. If a product is scarce,
consumers will typically have to pay more to obtain it. The opposite is true for a product that consumers can find
in abundance.Utility Maximization
Consumers must decide what specific combination of goods will yield the greatest utility. To maximize utility, con-
sumers must spend their money in such a way as to ensure that every dollar spent equals the same amount of marginal
utility the product yields. In essence, the dollar you spend should equal the additional satisfaction each unit gives you.
If the dollar is not equal to the value of marginal utility, then total utility declines.
The Demand Curve
As prices rise, the quantity demanded of a product declines. An inverse relationship between quantity demanded and
price exists on the demand curve. This inverse relationship between price and quantity arises from diminishing mar-
ginal utility and consumer equilibrium.
Consumers allocate their income among goods and services to maximize utility. Consumers are in equilibrium when
their total budgets are expended and the marginal utilities per dollar of expenditure on the last unit of each good are the
same. A change in the price of a good will disturb consumers’ equilibrium because it will cause the perceived values of
the utility and price to change. Once prices change, consumers alter their quantity demanded, and this alters consumers’
equilibrium.
Consumer Surplus
Consumers value each good differently at each price. The demand curve is proof of this because quantity demanded
changes with each price change. For example, if Ernie buys five CDs for $10, he will get a CD for $2 a piece. If the
price of CDs increased to $3 a piece, Ernie will more than likely lower his quantity demanded in CDs. At each point on
Ernie’s demand curve, his values of quantity change because of prices. The value that Ernie places on the first CD is the
price he is willing and able to pay for it. Consumer surplus is the difference between what a consumer is willing and
able to pay for a good or service and the market price for that good or service.
The overall theme for this chapter is costs and benefits. You must be able to distinguish between utility, marginal utility,
and total utility. Remember that costs and benefits affect every decision and that rational behavior allows us to evaluate
those costs and benefits. Consumer choice involves evaluating what appeals to self-interest and satisfaction. Producers
are forced to appeal to various self-interests and that in turn creates variety and selection for products. When consumers
choose products, they are taking into account the costs and benefits of choosing that product. Consumers should also
weigh the value of total utility.
Choices and Utility