Behind every supply and demand curve is an army of producers and consumers making their own decisions. For consumers, their decisions are driven, quite simply, by what they want! All consumers make decisions to maximize their utility. In this lecture, we will learn about utility, how to define it and how we represent it mathematically.
How does each slice of pizza you consume impact your utility for the next? Image courtesy of William Jones on Flickr.
Keywords: Consumer theory; preference assumptions; indifference curves; utility functions; marginal utility.
Read the recitation notes, which cover new content that adds to and supplements the material covered in lecture.
Before watching the lecture video, read the course textbook for an introduction to the material covered in this session:
- [R&T] Chapter 7, “The Analysis of Consumer Choice.” Sections 7.1, 7.2.1-2, and 7.3.2.
- [Perloff] Chapter 4, “Consumer Choice.” (optional)
This concept quiz covers key vocabulary terms and also tests your intuitive understanding of the material covered in this session. Complete this quiz before moving on to the next session to make sure you understand the concepts required to solve the mathematical and graphical problems that are the basis of this course.
Which of the following is NOT an assumption that we make about consumer preferences?
This is a property of indifference curves (they are downward-sloping), not of the underlying preferences. Non-satiation, completeness and transitivity are the key assumptions made about consumer preferences.
Why can't indifference curves be upward-sloping?
If an indifference curve is upward-sloping, it implies you are indifferent between a combination with a smaller amount of both good x and good y, and a combination with a larger amount of both good x and good y. The non-satiation principle tells us more is always better, and so the bundle with a larger amount of both good x and good y must be preferred.
How is marginal utility defined?
Marginal utility captures how your utility changes when you consume more of a good.
How does the marginal rate of substitution change as you move along a non-linear indifference curve?
A non-linear indifference curve is concave to the origin, and the marginal state of substitution is declining as you move along the indifference curve to the right. Assume pizza is on the y-axis and movies are on the x-axis. As you move to the right, you have more and more movies, and the marginal utility from each additional movie decreases. Accordingly, the marginal rate of substitution (the rate at which you are willing to trade movies for pizza) declines—you have too many movies, so you'd be happy to give some up for pizza, even if you don't get much pizza in exchange! (Note there is one exception to this rule; if you have a linear indifference curve, the marginal rate of substitution is constant. For this reason, the question specified non-linear indifference curves.)
What is an appropriate intuitive explanation of the principle of diminishing marginal utility?
These are all appropriate ways to capture the intuition behind the principle of diminishing marginal utility.
These optional resources are provided for students that wish to explore this topic more fully.
Textbook Study Materials
See the [Perloff] chapter for the topics covered, as well as quizzes, applications, and other related resources.
Other OCW and OER Content
|“Axioms of Consumer Preference and the Theory of Choice.” Lec #3 in 14.03 Microeconomic Theory and Public Policy, Fall 2010.||MIT OpenCourseWare||Alternative notes with an advanced theoretical approach.|