133 Putting It Together: Utility

Summary

The goal of this module was to explain how consumer behavior shapes the demand curve with respect to utility and loss. You learned how to:

• Define the concept of utility, and to be able to differentiate between marginal and total utility
• Explain how consumers maximize total utility within a given income or budget using the Utility Maximizing Rule
• Explain how consumer’s utility changes when income or prices change
• Describe the behavioral economics approach to understanding decision-making

Examples

The key underlying principle in this module was getting the biggest bang for the buck.  This principle will be used over and over again in different contexts in this text, and the results will sometimes surprise you.

Let’s return to the GPA example in the “Why it Matters” Feature.  To keep it simple, let us suppose you are only taking two courses, an “easy” course, and a “hard” course, where the difficulty is defined by how much time and effort it takes to earn a given grade.  Is Principles of Microeconomics an easy course or a hard one for you?  I don’t know.  You can decide which of your courses falls into each category.  Many people think that it makes the most sense to spend the most time and effort on the hard course.  After all, a hard course requires more time to learn, right?  That’s true, but if you think like an economist, you’ll see that to maximize your GPA, given a limited amount of study time, it makes more sense to start with the course where your study time will have the most impact on your grades, the biggest bang for the buck.  In other words, you should start with the easy course and quite possibly spend more time on it, until to assure yourself of an A.

This is no different than choosing to spend more of your budget on the product that gives you the most marginal utility per dollar spent.  It both cases, you make the most of your scarce resource, budget dollars in the consumption case and study hours in the GPA case.

As you proceed through the rest of this text, look for opportunities to apply the biggest bang for the buck principle.