{"id":6371,"date":"2018-02-05T15:35:19","date_gmt":"2018-02-05T15:35:19","guid":{"rendered":"https:\/\/courses.lumenlearning.com\/wm-microeconomics\/chapter\/reading-consumption-choices\/"},"modified":"2018-06-08T17:31:20","modified_gmt":"2018-06-08T17:31:20","slug":"consumer-choice-and-utility","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/cuny-kbcc-microeconomics\/chapter\/consumer-choice-and-utility\/","title":{"raw":"Consumer Choice and Utility","rendered":"Consumer Choice and Utility"},"content":{"raw":"

What you\u2019ll learn to do:\u00a0describe the concept of utility and explain how consumers spend in order to maximize utility<\/h2>\r\n[caption id=\"\" align=\"aligncenter\" width=\"651\"]\"This Figure 1. Investment Choices.<\/strong> Higher education is generally viewed as a good investment, if one can afford it, regardless of the state of the economy. (Credit: modification of work by Jason Bache\/Flickr Creative Commons)[\/caption]\r\n

Microeconomics seeks to understand the behavior of individual economic agents such as individuals and businesses. Economists believe that we can analyze individuals\u2019 decisions, such as what goods and services to buy, as choices we make within certain budget constraints. Generally, consumers are trying to get the most for their limited budget. In economic terms they are trying to maximize total utility, or satisfaction, given their budget constraint.<\/p>\r\n

Everyone has their own personal tastes and preferences. The French say: Chacun \u00e0 son go\u00fbt<\/em>, or \"Each to his own taste.\" An old Latin saying states, De gustibus non est disputandum<\/em> or \"There\u2019s no disputing about taste.\" If people base their decisions on their own tastes and personal preferences, however, then how can economists hope to analyze the choices consumers make?<\/p>\r\n

An economic explanation for why people make different choices begins with accepting the proverbial wisdom that tastes are a matter of personal preference. However, economists also believe that the choices people make are influenced by their incomes, by the prices of goods and services they consume, and by factors like where they live.<\/p>\r\nThis section introduces the economic theory of how consumers make choices about what goods and services to buy with their limited income.\u00a0If you look at Facebook for five fewer minutes a day, will you really be more productive? Is it worth it to clock into work ten minutes early, or would it be best to spend that time with your significant other? Is it worth it to spend five\u00a0dollars on a dessert when you already feel a little bit full? In this section, you will examine choices made at the margin,\u00a0or\u00a0the decisions you make to do a little more or a little less of something.\r\n

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Learning Objectives<\/h3>\r\n
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  • Explain utility and its connection to consumer behavior<\/li>\r\n \t
  • Calculate the\u00a0total utility of a collection of goods and services<\/li>\r\n<\/ul>\r\n<\/div>\r\n

    Consumer Choices<\/h2>\r\n

    Information on the consumption<\/span> choices of Americans is available from the Consumer Expenditure Survey carried out by the U.S. Bureau of Labor Statistics. Figure 1 shows spending patterns for the average U.S. household. The first row shows income and, after taxes and personal savings are subtracted, it shows that, in 2015, the average U.S. household spent $48,109 on consumption. The table then breaks down consumption into various categories. The average U.S. household spent roughly one-third of its consumption on shelter and other housing expenses, another one-third on food and vehicle expenses, and the rest on a variety of items, as shown. These patterns will vary for specific households by differing levels of family income, by geography, and by preferences.<\/p>\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n\r\n
    Table 1. U.S. Consumption Choices in 2015\u00a0(Source: http:\/\/www.bls.gov\/cex\/csxann13.pdf)<\/caption>\r\n
    Average Household Income before Taxes<\/strong><\/td>\r\n$62,481<\/strong><\/td>\r\n<\/tr>\r\n
    Average Annual Expenditures<\/strong><\/td>\r\n$48.109<\/strong><\/td>\r\n<\/tr>\r\n
    Food at home<\/td>\r\n$3,264<\/td>\r\n<\/tr>\r\n
    Food away from home<\/td>\r\n$2,505<\/td>\r\n<\/tr>\r\n
    Housing<\/td>\r\n$16,557<\/td>\r\n<\/tr>\r\n
    Apparel and services<\/td>\r\n$1,700<\/td>\r\n<\/tr>\r\n
    Transportation<\/td>\r\n$7,677<\/td>\r\n<\/tr>\r\n
    Healthcare<\/td>\r\n$3,157<\/td>\r\n<\/tr>\r\n
    Entertainment<\/td>\r\n$2,504<\/td>\r\n<\/tr>\r\n
    Education<\/td>\r\n$1,074<\/td>\r\n<\/tr>\r\n
    Personal insurance and pensions<\/td>\r\n$5,357<\/td>\r\n<\/tr>\r\n
    All else: alcohol, tobacco, reading, personal care, cash contributions, miscellaneous<\/td>\r\n$3,356<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n
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    Consumer Choice and\u00a0Utility<\/span><\/h2>\r\n

    When economists talk about consumer choice, what they are referring to is the combination of goods and services a consumer purchases.\u00a0To understand how a household will make its choices, economists look at what consumers can afford, as shown in a budget constraint<\/strong> (or budget line), and the total utility<\/strong> or satisfaction derived from those choices. When we graph a budget constraint, the quantity of one good is on the horizontal axis and the quantity of the other good on the vertical axis. The budget constraint line shows the various combinations of two goods that are affordable given a specific budget (or level of consumer income). <\/span><\/p>\r\n\r\n

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    Watch It<\/h3>\r\nWatch the selected clip from this video to review budget constraints. The budget constraint graph shows the various combinations of goods (like coffee and pizza) that you can afford at any given price. We'll finish the second portion of the video later in the module.\r\n