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Consumer choices

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It's a hot summer day. You have been out walking all morning and you're getting thirsty. It's also about lunchtime, and you're feeling pretty hungry, too. What luck! Here's a kiosk selling snacks. You’ve got six euros to spend. You can buy bars of chocolate or bottles of water... or a combination of both. Now you've got another problem: consumer choice.

If you're a neoclassical economist, however, there's nothing to worry about. Neoclassical economists believe that consumers make rational choices. Before a consumer buys something, they think about the cost and the amount of satisfaction the purchase will givethem. They then compare the price and satisfaction of possible alternative purchases. In the end, they buy what gives them maximum satisfaction at the lowest cost.

So. what will you buy from the kiosk? An important deciding factor is the amount have to spend. Economists call this your budget constraint. Your total budget is six euros. Bottles of water are two euros each chocolate bars arc one euro each. You could buy three bottles of water, or you could buy six chocolate bars. any combination. Or you buy any combination that adds up to your total budget. We can put all if this information on a budget line like the one in figure. The budget line shows what combinations of goods are possible.

Economists call these combinations are bundles. But when is the best bundle? This depends, on something called utility. Utilityis the economists' for the satisfaction we get from a purchase. Each good its own utility value for the consumer. The utility of a bundle depends on two things: the utility of the goods in the bundle and how much of each good is in thebundle. Figure 2 on page 25 shows the bundles of chocolate and water that give the same level of utility. This kind of chart is called an indifference curve. Any point on the curvehas the same utility value as any other point. For example, two bottles of water and two chocolate bars.

In figure 2, we assume that chocolate and water that chocolate and water have the same utility value for the consumer. But if water had a higher utility value than chocolate, the curve would be a different shape. Many things can affect the utility of a good. These include the cost of the good, the consumer's income and something called marginal utility.

To understand marginal utility, just think about chocolate bars. Every time you consume a bar of chocolate, the satisfaction you get from the next bar will be less. In other words, you get less utility every time you eat another bar. This decrease in utility is called the marginal utility. The marginal utility is the one of an additional item. For example:

Bars of chocolate Marginal utility Total utility

1 10 10

2 9 19

3 8 27

4 7 34

 

Put very simply, budget, price and level of utility will all affect choice at the kiosk. The neoclassical theory of consumer choice says that it is possible to calculate demand for products if we know this kind of information. However, not all economists agree!





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