The Rational Consumer

10

 

  • How consumers choose to spend their income on goods and services

  • Why consumers make choices by maximizing utility, a measure of satisfaction from consumption

  • Why the principle of diminishing marginal utility applies to the consumption of most goods and services

  • How to use marginal analysis to find the optimal consumption bundle

  • What income and substitution effects are

A WING TOO FAR

When is more of a good thing too much?

RESTAURANTS OCCASIONALLY offer “all-you-can-eat” specials to entice customers: all-you-can-eat salad bars, all-you-can-eat breakfast buffets, and all-you-can-eat chicken wing dinners.

But how can a restaurant owner who offers such a special be sure he or she won’t be eaten out of business? If the restaurant charges $12.99 for an all-you-can-eat wing dinner, what prevents the average customer from wolfing down $30 worth of wings?

The answer is that even though every once in a while you see someone really take advantage of the offer—heaping a plate high with 30 or 40 chicken wings—it’s a rare occurrence. And even those of us who like chicken wings shudder a bit at the sight. Five or even 10 chicken wings can be a treat, but 50 is ridiculous. Anyone who pays for an all-you-can-eat meal wants to make the most of it, but a sensible person knows when one more wing would be one wing too many.

Notice that last sentence. We said that customers in a restaurant want to “make the most” of their meal; that sounds as if they are trying to maximize something. And we also said that they will stop when consuming one more wing would be a mistake; that sounds as if they are making a marginal decision.

The answer is yes, it is a matter of taste—and economists can’t say much about where tastes come from. But economists can say a lot about how a rational individual goes about satisfying his or her tastes. And that is in fact the way that economists think about consumer choice. They work with a model of a rational consumer—a consumer who knows what he or she wants and makes the most of the available opportunities.

In this chapter, we will show how to analyze the decisions of a rational consumer. We will begin by showing how the concept of utility—a measure of consumer satisfaction—allows us to begin thinking about rational consumer choice. We will then look at how budget constraints determine what a consumer can buy and how marginal analysis can be used to determine the consumption choice that maximizes utility. Finally, we will see how this analysis can be used to understand the law of demand and why the demand curve slopes downward.

For those interested in a more detailed treatment of consumer behaviour and coverage of indifference curves, see the appendix that follows this chapter.