Elasticity, Microeconomic Policy, and Consumer Theory ‹ 93
7.4 Consumer Choice
Main Topics: Utility; Unconstrained Consumer Choice; Diminishing Marginal Utility;
Constrained Utility Maximization; Constrained Utility Maximization; Two Goods
If you pull back the curtain on the law of demand to study how consumers behave, much
insight can be gained. It’s important to remember that people demand things because those
things make those people happy.We choose to consume mundane items like electricity or
crackers, or luxury items like trans-Atlantic flights and tickets to an NFL game, because
they provide us with happiness. In economics, we call this happiness (or benefit, or satis-
faction, or enjoyment) utility.
While in the course of a week, consumption of more and more pints of Cherry Garcia
ice cream is likely to increase ourtotal utility, it is probably safe to say that the first pint
in a week provides more marginal utilitythan the second, third, or fourth pint. If you
recall from Chapter 5, analysis of marginal changes is extremely important in modeling
how individuals make decisions.
- Total utility (TU) is the total amount of happiness received from the consumption of a
certain amount of a good.
- Marginal utility (MU) is the additional utility received (or sometimes lost) from the con-
sumption of the nextunit of a good.
- Mathematically speaking: MU =∆TU/∆Q(this ∆Qis likely to equal 1 if you are con-
suming one additional unit at a time).
Example:
Table 7.5 summarizes the utility gained from consumption of successive cups of
coffee in a typical morning at work. Some choose to measure utility in hypo-
thetical “utils,” but I like to think about these as “happy points.”
As our coffee drinker (Joe) goes from zero to one cup of coffee, his total happiness
from coffee drinking increases from zero to 20 happy points. The incremental, or mar-
ginal, change is also 20 points. The marginal utility is simply calculated as the differ-
ence between the totals as Joe consumes consecutive cups of coffee.
Table 7.5
TOTAL UTILITY (TU) MARGINAL
# CUPS(Q) (“HAPPY POINTS”) UTILITY (MU)
00 —
120 20
235 15
345 10
450 5
545 – 5
6 35 –10
KEY IDEA
