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By the end of this section, you will be able to:

  • Calculate total utility
  • Propose decisions that maximize utility
  • Explain marginal utility and the significance of diminishing marginal utility

Information on the consumption choices of Americans is available from the Consumer Expenditure Survey carried out by the U.S. Bureau of Labor Statistics. [link] shows spending patterns for the average U.S. household. The first row shows income and, after taxes and personal savings are subtracted, it shows that, in 2015, the average U.S. household spent $48,109 on consumption. The table then breaks down consumption into various categories. The average U.S. household spent roughly one-third of its consumption on shelter and other housing expenses, another one-third on food and vehicle expenses, and the rest on a variety of items, as shown. Of course, these patterns will vary for specific households by differing levels of family income, by geography, and by preferences.

(Source: http://www.bls.gov/cex/csxann13.pdf)
U.s. consumption choices in 2015
Average Household Income before Taxes $62,481
Average Annual Expenditures $48.109
Food at home $3,264
Food away from home $2,505
Housing $16,557
Apparel and services $1,700
Transportation $7,677
Healthcare $3,157
Entertainment $2,504
Education $1,074
Personal insurance and pensions $5,357
All else: alcohol, tobacco, reading, personal care, cash contributions, miscellaneous $3,356

Total utility and diminishing marginal utility

To understand how a household will make its choices, economists look at what consumers can afford, as shown in a budget constraint line    , and the total utility    or satisfaction derived from those choices. In a budget constraint line, the quantity of one good is measured on the horizontal axis and the quantity of the other good is measured on the vertical axis. The budget constraint line shows the various combinations of two goods that are affordable given consumer income. Consider the situation of José, shown in [link] . José likes to collect T-shirts and watch movies.

In [link] , the quantity of T-shirts is shown on the horizontal axis, while the quantity of movies is shown on the vertical axis. If José had unlimited income or goods were free, then he could consume without limit. But José, like all of us, faces a budget constraint    . José has a total of $56 to spend. The price of T-shirts is $14 and the price of movies is $7. Notice that the vertical intercept of the budget constraint line is at eight movies and zero T-shirts ($56/$7=8). The horizontal intercept of the budget constraint is four, where José spends of all of his money on T-shirts and no movies ($56/14=4). The slope of the budget constraint line is rise/run or –8/4=–2. The specific choices along the budget constraint line show the combinations of T-shirts and movies that are affordable.

A choice between consumption goods

The points on the graph show how a budget is affected by spending choices. Spending more money at the movies (y-axis) means that Jose' has less money to spend on T-shirts (x-axis).
José has income of $56. Movies cost $7 and T-shirts cost $14. The points on the budget constraint line show the combinations of movies and T-shirts that are affordable.

José wishes to choose the combination that will provide him with the greatest utility    , which is the term economists use to describe a person’s level of satisfaction or happiness with his or her choices.

Questions & Answers

the various economic systems;
King Reply
what is consumer surplus
Amara Reply
What is economics
Lekan Reply
economic is a social science that studies human behaviour as a relationship between
Kakay
economics is the study of how people allocate their limited resources to provide for their wants
Caliphonia
what causes demand curve shift to left
Richard Reply
When the price of a good rise rapidly
Daniella
what are the disadvantages of dumping
Edwin Reply
what isa microeconomics use for
Favour Reply
what causes demand curve shifted to the left?
Richard
what is demand
John Reply
demand is amount of goods and services that a consumer is willing and able to purchase at a giving price over a period of time
roy
demand is some specific thing thats needed by consumer at a certain time
Melat
demand is the willingness and ability to demand a particular product at a particular price and at a particular time
Rahul
demand is an ability and willingness of a consumer to purchase a particular commodity at a given price over a period of time
adebiyi
What does the 45-degree line show
Hassan Reply
the supply line
Neolskae
been unemployed mean s u don't have work whilst been out of labour for means you are not in age of working or you are above the working age (aged)
roy Reply
no, only the working age
roy
Please briefly explain the relationship between the scarcity, choice and opportunity costs
Thandokazi Reply
What is the effect of raising in price to revenue
Michael Reply
yes
Saa
what is the difference between inflation and deflation?
nebye
price effect
Hez
when you increase price, you increase revenue
Hez
What are the types of price elasticity of supply
jamilu Reply
What's are the types of elasticity
jamilu
what is effect of riaising in price to revenue
Shiyghan Reply
consumer consumption will reduce, as well as demand will fall.
kuntu
what cause inflation
Foday Reply
expenditure on capital goods by the business is known as?
rhandzu Reply
ok
Shiyghan
capital expenditure
Zulkiful

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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