<< Chapter < Page Chapter >> Page >

By the end of this section, you will be able to:

  • Calculate total utility
  • Propose decisions that maximize utility
  • Explain marginal utility and the significance of diminishing marginal utility

Information on the consumption choices of Americans is available from the Consumer Expenditure Survey carried out by the U.S. Bureau of Labor Statistics. [link] 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. Of course, these patterns will vary for specific households by differing levels of family income, by geography, and by preferences.

(Source: http://www.bls.gov/cex/csxann13.pdf)
U.s. consumption choices in 2015
Average Household Income before Taxes $62,481
Average Annual Expenditures $48.109
Food at home $3,264
Food away from home $2,505
Housing $16,557
Apparel and services $1,700
Transportation $7,677
Healthcare $3,157
Entertainment $2,504
Education $1,074
Personal insurance and pensions $5,357
All else: alcohol, tobacco, reading, personal care, cash contributions, miscellaneous $3,356

Total utility and diminishing marginal utility

To understand how a household will make its choices, economists look at what consumers can afford, as shown in a budget constraint line    , and the total utility    or satisfaction derived from those choices. In a budget constraint line, the quantity of one good is measured on the horizontal axis and the quantity of the other good is measured on the vertical axis. The budget constraint line shows the various combinations of two goods that are affordable given consumer income. Consider the situation of José, shown in [link] . José likes to collect T-shirts and watch movies.

In [link] , the quantity of T-shirts is shown on the horizontal axis, while the quantity of movies is shown on the vertical axis. If José had unlimited income or goods were free, then he could consume without limit. But 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 of all of 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 T-shirts and movies that are affordable.

A choice between consumption goods

The points on the graph show how a budget is affected by spending choices. Spending more money at the movies (y-axis) means that Jose' has less money to spend on T-shirts (x-axis).
José has income of $56. Movies cost $7 and T-shirts cost $14. The points on the budget constraint line show the combinations of movies and T-shirts that are affordable.

José wishes to choose the combination that will provide him with the greatest utility    , which is the term economists use to describe a person’s level of satisfaction or happiness with his or her choices.

Questions & Answers

type of goods and services
Nesar Reply
There are two types of goods which are capital and consumer goods
Muafue
what is microeconomics
Mahmood
micro-economics is the study of how firms and households make decisions and how they interact
Saadaq
discuss separately how scarcity arises for house holds, business and government
Hawa
who gave the concept of perfect competition in economics?
Sandeep Reply
 Léon Walras gave the first definition of perfect competition   
ADITYA
no, it was me😂
Nancy
What is Indifference curve?
Ch
Perfect competition is an idealized market structure that achieves an efficient allocation of resources.
Daauud
what are the conditions for determining the nature of goods in partial differentiation
Unique
what is economics
Arman Reply
is a science which study human behaviour as relationship between ends and scarce means hav altenative uses
Herieth
what are the other factors of demand
Aysher Reply
what are other factors in demand
Aysher
What is price elasticity of demand
Ghulam Reply
ok
debashis
what makes a country to be operating within the PPC
The Reply
two different product that are being are being produced efficiently
Othusitse
what is quartile
sukhdeep Reply
quartile occurs as a numerical probabilistic aspect such as quartile 1,2 or 3.
Othusitse
what will happen ifvwe will increase the price
Harleen Reply
due to increase the price the demand redeuce to related product
abdullah
the higher the price leads to low quantity to be demanded
Herieth
what is demand change
George
When price of any commodity change than demand is automatically change. Prince and demand have direct relationship.
Ch
what is long run?
Cabdulahi Reply
what will be the price
Harleen Reply
how the price determined in oligopoly?
Sahil Reply
what are the main problems in the market!?
Baby Reply
Price effect is a combination of income and substitution effect discuss
saroj Reply
Randy how IC energetic is superior to utilise energetic
saroj
why economics is undependent subject?
Yohanissy Reply
Why?
Ch
What's the scope of Economic?
Ch
What's Economic scope?
Ch
what is c.s p.s and market efficency
Raghu
what is scope of economics
Herieth Reply
Scope of economic?
Ch
it consist of *subject matter of economics *normative and positive *economics problem solving * science and arts
Herieth
A few days ago i get admission in MS.C economic. How i grip it?
Ch
in which university you take admission?
Shoaiq
I get admission in a acadme.And that is relevate with Peshawar university.
Ch
Pertinent bro
Muafue
Did anybody have Macroeconomic nd Microeconomic's'notes?
Ch
how economics is a particular kind of economising!?
Baby
i hav notes of microeconomics
Herieth
human touch has entirely missing(means wat as criticsm of robbin definition
Herieth
what is demand?
Cabdulahi

Get the best Microeconomics course in your pocket!





Source:  OpenStax, Microeconomics. OpenStax CNX. Aug 03, 2014 Download for free at http://legacy.cnx.org/content/col11627/1.10
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Microeconomics' conversation and receive update notifications?

Ask