7: The Rational Consumer

!arrow! What You Will Learn in This Section

  • 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

THE ABSOLUTE LAST BITE

When is more of a good thing too much?
craftvision/Getty Images

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 fried-clam dinners.
But how can a restaurant owner who offers such a special be sure he won’t be eaten out of business? If he charges $12.99 for an all-you-can-eat clam dinner, what prevents his average customer from wolfing down $30 worth of clams?
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 fried clams—it’s a rare occurrence. And even those of us who like fried clams shudder a bit at the sight. Five or even 10 fried clams can be a treat, but 30 clams 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 bite would be one bite 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 bite would be a mistake; they are making a marginal decision.
But it is a marginal decision that also involves a person’s tastes. While economists can’t say much about where tastes come from, they can say a lot about how a rational individual uses marginal analysis to satisfy 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 section, 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 think about rational consumer choice.
We will then look at how budget constraints determine what a consumer can afford to 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 behavior and coverage of indifference curves, see the appendix that follows this section.