Nama : Putry Adelina Siagian

Nim : 7202240002
Kelas : Ilmu Ekonomi B

Summary Chapter 7: The Analysis of Consumer Choice

In this chapter we have examined the model of utility-maximizing behavior. Economists
assume that consumers make choices consistent with the objective of achieving the maximum
total utility possible for a given budget constraint. Utility is a conceptual measure of
satisfaction; it is not actually measurable. The theory of utility maximization allows us to ask
how a utility-maximizing consumer would respond to a particular event.
Individual demand curves reflect utility-maximizing adjustment by consumers to changes in
price. Market demand curves are found by summing horizontally the demand curves of all the
consumers in the market. The substitution effect of a price change changes consumption in a
direction opposite to the price change. The income effect of a price change reinforces the
substitution effect if the good is normal; it moves consumption in the opposite direction if the
good is inferior.
By following the marginal decision rule, consumers will achieve the utility-maximizing
condition: Expenditures equal consumers’ budgets, and ratios of marginal utility to price are
equal for all pairs of goods and services. Thus, consumption is arranged so that the extra
utility per dollar spent is equal for all goods and services. The marginal utility from a
particular good or service eventually diminishes as consumers consume more of it during a
period of time. Utility maximization underlies consumer demand. The amount by which the
quantity demanded changes in response to a change in price consists of a substitution effect
and an income effect. The substitution effect always changes quantity demanded in a manner
consistent with the law of demand. The income effect of a price change reinforces the
substitution effect in the case of normal goods, but it affects consumption in an opposite
direction in the case of inferior goods. An alternative approach to utility maximization uses
indifference curves. This approach does not rely on the concept of marginal utility, and it
gives us a graphical representation of the utility-maximizing condition.
A budget line shows combinations of two goods a consumer is able to consume, given a
budget constraint. An indifference curve shows combinations of two goods that yield equal
satisfaction. To maximize utility, a consumer chooses a combination of two goods at which
an indifference curve is tangent to the budget line. At the utility-maximizing solution, the
consumer’s marginal rate of substitution (the absolute value of the slope of the indifference
curve) is equal to the price ratio of the two goods. We can derive a demand curve from an
indifference map by observing the quantity of the good consumed at different prices.