• Unit 5: Introduction to Consumer Choice

    As you know, consumers are driven by their unique preferences when they seek to maximize their satisfaction (utility) while considering their limited budgets. Despite the subjectivity of preferences, choices are also influenced by income and prices. This Unit introduces the economic theories behind consumer decision-making. We build upon the budget constraint concept from Unit 1 and demonstrate how economic theory helps predict consumption responses to price and income changes.

    Completing this unit should take you approximately 3 hours.

    • 5.1: The Rational Consumer, Consumer Preferences, and Consumer Choice

      Are consumers rational? How do economists explain and measure consumer preferences and choices?

      In 1986, Adam Wagstaff argued that hospitals face the dilemma of not having enough resources to provide life-saving treatments to all patients. However, the technology was/is available to do so. Instead, society allocates resources to other priorities such as infrastructure, sports, education, and defense.

      Wagstaff explained that while individuals may value their health, they do not prioritize it above all else, as evidenced by behaviors like overeating, smoking, and drinking alcohol. The allocation of resources to non-health-related areas indicates that health is not the overriding value for society. (Wagstaff A. The Demand For Health: Some New Empirical Evidence. Journal of Health Economics, 1986)

      In this section, we explore the rationality of consumer choices by introducing the concepts of total and marginal utility and exploring consumer preferences. Terms like rationality, choices, and marginal utility may seem intimidating, but at the heart of it all, we are simply exploring the question: What do people desire in life?

    • 5.2: Indifference Curves

      Suppose a consumer has a limited monthly budget and wants to maximize their satisfaction (utility) by deciding how much to spend on video games and streaming video subscriptions. Indifference curves can help illustrate their preferences and choices based on what you have already studied in section 5.1.

    • 5.3: Building the Demand Curve from an Indifference Curve Map

      Consumer choice and equilibrium analysis may appear dense and abstract initially. You might wonder if such a framework is necessary for analyzing consumer choices. In reality, economists employ this framework to address various issues, including taxation on energy-dense foods, evaluating health-related quality of life, and assessing risk levels in financial decisions, among others.

      When we introduced the law of demand and the demand curve in Unit 2, we did not delve into the full details. Now, you are prepared to understand that the demand curve can be derived by adjusting the prices of the products considered in the indifference curve-budget line framework presented in the preceding section.

    • Unit 5 Assessment

      • Receive a grade