Consumer Theory

Concepts

• Consumer Surplus
• Calculating Consumer Surplus
• Utility
• Total Utility vs. Marginal Utility
• Law of Diminishing Marginal Utility
• Utility Per Dollar
• Utility-Maximization/Consumer Equilibrium: MU_x/P_x = MU_y/P_y
• Free item consume to MU = 0

Overview

In our lesson about consumer theory there are 2 major concepts we address: consumer surplus and consumer equilibrium. Consumer surplus is pretty easy to understand. It represents the difference between what we’re willing to pay for a product and the price we actually pay for the product.  We also learn the 2 ways to calculate consumer surplus. The second major concept we discuss is consumer equilibrium, also referred to as utility maximization. This concept is a bit more complex, but ultimately comes down to finding the point where the utility per dollar spent on one item is equal to the utility per dollar spent on the other item.

Materials

• Lecture Notes
• Practice Problems

Lecture

Consumer Surplus

Total and Marginal Utility

Utility Maximizing Rule

Quiz

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