• Unit 4: The Consumer

    In this unit we focus on the individual consumer and the characteristics that compel them (to choose) to spend income on goods and services. The consumer experiences utility - a measure of satisfaction - with every purchase they make, and economists measure this utility to determine a consumer's optimal rate of consumption. The theory of demand is derived from the theory of consumer behavior presented in this unit. We can explain an individual's demand function by two approaches that help illustrate personal preferences: utility analysis and indifference analysis. We explore these concepts more fully in this unit.

    Completing this unit should take you approximately 10 hours.

    • Upon successful completion of this unit, you will be able to:

      • explain consumer preferences using concepts related to utility, including total utility and marginal utility;
      • analyze a household’s budget line and describe how it changes when prices or incomes change;
      • use indifference curves to explain the principle of diminishing marginal rate of substitution; and
      • derive a demand curve from an indifference map by analyzing the quantity of the good consumed at different prices.


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

      • Introduction to Consumer Choices Book
        Read all the sections in this chapter for information on consumer choice, including utility, consumer equilibrium, consumer equilibrium demand, consumer surplus, budget constraint, and consumer equilibrium and indifference curves.
      • The Analysis of Consumer Choice Book
        Read the Introduction and these two sections. Attempt the "Try It" problems at the end of each section. Take a moment to read through the stated learning outcomes for this chapter of the text, which you can find at the beginning of each section. These outcomes should be your goals as you read through the chapter.
      • Rules for Maximizing Utility Book
        Read this article to learn more about how to calculate marginal utility per dollar. Make sure to answer the "Try It" questions.
      • The Art of Choosing Page
        This is an optional lecture and not a requirement of the course. The speaker talks about her ground-breaking research on how people make choices and explains attitudes towards their decisions.
      • Marginal Utility Page
        Watch this video about marginal utility. Make sure that you understand that marginal utility is a concept in economics that is used to explain and measure the satisfaction that consumers get when consuming something. For example, if you consume a soda, we assume in economics that you get some sort of satisfaction, your "utility", and marginal utility will be the additional satisfaction that you get from consuming an additional soda.
      • Budget Line Page
        Watch this video to learn how to depict the budget line in a graph. Remember that the budget line for a consumer will show the different combinations that can be bought for two goods given a fixed budget of some sort.
      • Deriving Demand Curve from Tweaking Marginal Utility per Dollar Page
        Watch this video to lean how to arrive at the demand curve from working with the marginal utility per dollar. To review this concept of marginal utility per dollar, make sure to go back to the main reading in Unit 4.1
      • Equalizing Marginal Utility per Dollar Spent Page
        Watch this video about equalizing marginal utility per dollar spent for two products. Keep in mind that this method is for figuring out what products would people prefer to spend on given a budget.
      • Adding Demand Curves Page
        Watch this video about adding demand curves of individuals to arrive at the overall market demand curve. You can think of the overall demand curve as one that is composed of all of the individual demand curves.
      • Preference and Utility Page
        Watch this lecture for an explanation of consumer theory, and especially mathematical representations of consumer preferences.

    • 4.2: Indifference Curves

      • Indifference Curve Analysis: An Alternative Approach to Understanding Consumer Choice Book
        Read this section to learn about indifference analysis. Attempt the "Try It” problems at the end of the section before checking your answers.
      • Indifference Curves Book
        Read this section for additional details about indifference curves and consumer behavior.
      • Indifference Curve Analysis Book
        Follow this resource to learn more about the concept of indifference curves. Make sure to answer the "Try It" quiz questions that show you the correct answer.
      • Types of Indifference Curves Page
        Watch this video about to learn how to depict the different types of indifference curves depending on whether a product is a normal good, perfect substitute, or a perfect complement. You should consider reviewing the main reading material from Unit 4.1. that covered these concepts.
      • Optimal Point on Budget Line Page
        Watch this video about the optimal point on a budget line. The optimal consumer choice in the indifference curve analysis is determined by the tangency condition between the marginal rate of transformation (MRT) and the marginal rate of substitution (MRS).