What you will learn
in this Module:
- How consumers make
choices about the purchase
of goods and services - Why consumers’ general
goal is to maximize 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
module 51 Utility Maximization 511
Module 51
Utility Maximization
We have used the demand curve to study consumer responsiveness to changes in prices
and discovered its usefulness in predicting how consumers will gain from the availabil-
ity of goods and services in a market. But where does the demand curve come from? In
other words, what lies behind the demand curve? The demand curve represents the
tastes, preferences, and resulting choices of individual consumers. Its shape reflects the
additional satisfaction, or utility,people receive from consuming more and more of a
good or service.
Utility: It’s All About Getting Satisfaction
When analyzing consumer behavior, we’re looking into how people pursue their needs
and wants and the subjective feelings that motivate purchases. Yet there is no simple
way to measure subjective feelings. How much satisfaction do I get from my third
cookie? Is it less or more than the satisfaction you receive from your third cookie? Does
it even make sense to ask that question?
Luckily, we don’t need to make comparisons between your feelings and mine. The
analysis of consumer behavior that follows requires only the assumption that individu-
als try to maximize some personal measure of the satisfaction gained from consump-
tion. That measure of satisfaction is known as utility,a concept we use to understand
behavior but don’t expect to measure in practice.
Utility and Consumption
We can think of consumers as using consumption to “produce” utility, much in the
same way that producers use inputs to produce output. As consumers, we do not make
explicit calculations of the utility generated by consumption choices, but we
must make choices, and we usually base them on at least a rough attempt
to achieve greater satisfaction. I can have either soup or salad with
my dinner. Which will I enjoy more? I can go to Disney World
this year or put the money toward buying a new car. Which
will make me happier? These are the types of questions
that go into utility maximization.
The concept of utility offers a way to study choices that
are made in a more or less rational way.
Utilityis a measure of personal satisfaction.© Drive Images/Alamy