Lesson: Consumption Choices

Total Utility and Diminishing Marginal Utility

Total Utility and Diminishing Marginal Utility

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  • A budget is an estimate of the amount of income and expenses over a period of time. 
  • Budget constraints are limits on how much money is available to spend.
  • Total utility is a complete level of satisfaction.
  • In economics, utility is the level of satisfaction a consumer gets from a good or service.
  • Economists analyze consumer behavior to find a connection between spending and satisfaction.
  • The relationship between budget constraints and total utility shows how and why people buy items.

FOCUS: As you read, pay attention to the economists’ interpretation of individual choices.

To understand how a household will make its choices, economists look at what consumers can afford, as shown in a budget constraint (or budget line), and the total utility (or satisfaction) derived from those choices. In a budget constraint line, 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 consumer income. Consider José's situation, shown in the figure below. José likes to collect t-shirts and watch movies.

In the figure above, we show the number of t-shirts on the horizontal axis while we show the number of movies on the vertical axis. If José had unlimited income or goods were free, then he could consume without limit. However, José, like all of us, faces a budget constraint. José has a total of $56 to spend. The price of T-shirts is $14, and the price of movies is $7. Notice that the vertical intercept of the budget constraint line is at eight movies and zero t-shirts ($56/$7=8). The horizontal intercept of the budget constraint is four, where José spends all his money on T-shirts and no movies ($56/14=4). The slope of the budget constraint line is rise/run or –8/4=–2. The specific choices along the budget constraint line show the combinations of affordable T-shirts and movies.