AP Economics Mr. Bernstein Utility Maximization

AP Economics Mr. Bernstein Module 51: Utility Maximization September 8, 2014

AP Economics Mr. Bernstein

Utility Maximization • Consumers make choices about purchasing goods and services • Consumers goal is to maximize utility, or happiness • Utility is a measure of satisfaction gained from consuming a good or service • Can you really measure utility? Maybe not, but consumers know it when they make decisions 2

AP Economics Mr. Bernstein Utility Maximization • The principle of diminishing Marginal Utility (MU) applies to consumption of most goods and services. Example: Burgers?? • Consumers face budget constraints and purchase the bundle which maximizes Total Utility (TU) • Marginal analysis allows us to find optimal consumption bundles • Note: If Marginal Utility (MU) is declining but still positive, Total Utility (TU) is rising and that unit of the good should be consumed • Consumers should continue spending on a good until the MU of each good is equal. Why? 3

AP Economics Mr. Bernstein

Budgets and Optimal Consumption Bundle • Point C is unaffordable. Point A is not optimal. Books @ $25 each

B

C

A Movies @ $10 each 4