Page 461 - The Principle of Economics

cur ves to
sumer’s preferences. Another common way to represent pref- erences is with the concept of utility. Utility is an abstract mea- sure of the satisfaction or happi- ness that a consumer receives from a bundle of goods. Econo- mists say that a consumer prefers one bundle of goods to another if the first provides more utility than the second.
Indifference curves and utility are closely related. Be- cause the consumer prefers points on higher indifference
represent the con-
CHAPTER 21 THE THEORY OF CONSUMER CHOICE 471
FYI
Utility: An Alternative Way to Represent a Consumer’s Preferences
We have used indif ference
curves, bundles of goods on higher indifference curves pro- vide higher utility. Because the consumer is equally happy with all points on the same indifference curve, all these bundles provide the same utility. Indeed, you can think of an indifference curve as an “equal-utility” curve. The slope of the indifference curve (the marginal rate of substitution) re- flects the marginal utility generated by one good compared to the marginal utility generated by the other good.
When economists discuss the theory of consumer choice, they might express the theory using different words. One economist might say that the goal of the consumer is to maximize utility. Another might say that the goal of the con- sumer is to end up on the highest possible indifference curve. In essence, these are two ways of saying the same thing.
typically, the indifference curves are bowed inward, but not so bowed as to be- come right angles.
QUICK QUIZ: Draw some indifference curves for Pepsi and pizza. Explain the four properties of these indifference curves.
OPTIMIZATION: WHAT THE CONSUMER CHOOSES
The goal of this chapter is to understand how a consumer makes choices. We have the two pieces necessary for this analysis: the consumer’s budget constraint and the consumer’s preferences. Now we put these two pieces together and consider the consumer’s decision about what to buy.
THE CONSUMER’S OPTIMAL CHOICES
Consider once again our Pepsi and pizza example. The consumer would like to end up with the best possible combination of Pepsi and pizza—that is, the combi- nation on the highest possible indifference curve. But the consumer must also end up on or below his budget constraint, which measures the total resources available to him.
Figure 21-6 shows the consumer’s budget constraint and three of his many in- difference curves. The highest indifference curve that the consumer can reach (I2 in the figure) is the one that just barely touches the budget constraint. The point at which this indifference curve and the budget constraint touch is called the opti- mum. The consumer would prefer point A, but he cannot afford that point because