Lesson Overview
Consumer behavior examines how individuals allocate limited income across goods and services in order to maximize satisfaction.
Economists assume consumers are rational decision-makers who respond to incentives and compare costs and benefits at the margin.
Learning Objectives
- Define utility and marginal utility.
- Explain the law of diminishing marginal utility.
- Understand budget constraints.
- Explain how consumers maximize utility.
Utility: Measuring Satisfaction
Utility refers to the satisfaction or benefit a consumer receives from consuming a good or service.
Total vs. Marginal Utility
- Total Utility — Total satisfaction from consumption.
- Marginal Utility — Additional satisfaction from one more unit.
Law of Diminishing Marginal Utility
As a person consumes more of a good, the additional satisfaction from each extra unit declines.
The first slice of pizza brings high satisfaction. The fourth slice provides less.
Budget Constraint
Consumers face limited income and must choose combinations of goods they can afford.
The budget constraint represents all possible combinations of goods that a consumer can purchase given income and prices.
Utility Maximization Rule
Consumers maximize satisfaction when the marginal utility per dollar spent is equal across goods.
MU₁ / P₁ = MU₂ / P₂
If one good provides more satisfaction per dollar, consumers will purchase more of it until balance is restored.
Behavioral Insights
While traditional economics assumes rational decision-making, real-world behavior sometimes deviates due to biases, habits, and imperfect information.
Practice Questions
- Why does marginal utility decline as consumption increases?
- What happens if the price of one good decreases?
- How does income affect the budget constraint?
Reflection
Think about your weekly spending.
- Which purchases bring the highest satisfaction per dollar?
- Are there purchases you make out of habit rather than utility?
What’s Next?
In Lesson 2.6: Market Structures, we examine how firms respond to consumer behavior under different competitive environments.