This chapter considers what is rational behavior. At the heart of the investigation is the principle of diminishing marginal utility. It states that, after some point, the marginal utility received from each additional unit of a good decreases with each unit consumed. | The Logic of Individual Choice: The Foundation of Supply and Demand Chapter 8 Utility Theory and Individual Choice Economists have an answer to the question of why people behave as they do — self interest. Economists' analysis of individual choice does not deny individual differences. Utility Theory and Individual Choice A good beginning in understanding individual choice is to focus on the rational part of people's behavior. Utility Theory and Individual Choice Using the simple concept of self-interest, two things determine what people do: The pleasure people get from doing or consuming something. The price of doing or consuming that something. Utility Theory and Individual Choice Price is the market's tool to bring quantity supplied equal to the quantity demanded. Changes in price provide incentives for people to change what they are doing. Measuring Pleasure Economists start with a proposition that individuals try to get as much pleasure as possible out of life. The goods and services we consume provide value (satisfaction) to us. Measuring Pleasure Individuals want to maximize the amount of satisfaction they receive through consuming goods and services. Measuring Pleasure Economists use the concept of utility—the pleasure or satisfaction that one gets from consuming a good or service. A util is a unit created by economists to “measure” utility. Utility Utility serves as the basis of economists' analysis of individual choice. It is personal and individual. Utility cannot be compared across individuals. Total Utility Total utility refers to the total satisfaction one gets from consuming a product. Marginal Utility Marginal utility refers to the satisfaction one gets from the consumption of one additional unit of a product above and beyond what on has consumed up to that point. Total Utility and Marginal Utility As additional units are consumed, marginal utility decreases while total utility increases. When marginal utility is zero, total utility stops increasing. | The Logic of Individual Choice: The Foundation of Supply and Demand Chapter 8 Utility Theory and Individual Choice Economists have an answer to the question of why people behave as they do — self interest. Economists' analysis of individual choice does not deny individual differences. Utility Theory and Individual Choice A good beginning in understanding individual choice is to focus on the rational part of people's behavior. Utility Theory and Individual Choice Using the simple concept of self-interest, two things determine what people do: The pleasure people get from doing or consuming something. The price of doing or consuming that something. Utility Theory and Individual Choice Price is the market's tool to bring quantity supplied equal to the quantity demanded. Changes in price provide incentives for people to change what they are doing. Measuring Pleasure Economists start with a proposition that individuals try to get as much pleasure as possible out of life. The goods and .
