Utility and Marginal Utility
The theory of consumer choice relies on the concept of utility, which is another word for consumer satisfaction or happiness. As individuals seek to maximize their utility, specific behaviors often guide their choices. Concepts to help analyze choices are marginal utility and marginal utility per dollar.
Things are not always what they seem or what we expect. Review consumer theory and consumer equilibrium in:
Indifference Curves and Budget Lines
The concepts of consumer preference and utility help us understand how individuals compare goods and services. For example, individuals have to consider their budget limitations and how much money they have available to spend to make an optimal choice. We put consumer preferences and budget on the same graph to analyze consumer choice.
During your review, pay particular attention to income and substitution effects that arise from changes in a consumer's income, and the price of one or both of the goods.
Review consumer choice and optimization subject to a budget constraint in:
The indifference curve and budget constraint provide the foundation for the demand curve, which represents the negative relationship between price and quantity demanded (i.e. as price increases, quantity demanded decreases). Consider how we can use the consumer optimization framework to derive this relationship.
You can translate and represent these changes on an individual's demand curve.
Review how to construct a demand curve in: