Lecture # 8 – Consumer Behavior: An Introduction to
the Concept of Utility
I. Utility -- A Description of Preferences
• Our goal is to come up with a model that describes consumer behavior. To
begin, we need a way to describe preferences. Economists use utility to do this.
• Utility is the level of satisfaction that a person gets from consuming a good or
undertaking an activity.
o It is the relative ranking, not the actual number, that matters.
• Marginal utility is the satisfaction obtained from consuming an additional amount
of a good. It is the change in total utility resulting from a one-unit change in
product.
o Marginal utility diminishes (gets smaller) as you consume more of a good
(the fifth ice cream cone isn't as desirable as the first).
o However, as long as marginal utility is positive, total utility will increase!
II. Mapping Preferences -- Indifference Curves
• Since economics is about allocating scarce resources -- that is, asking what
choices people make when faced with limited resources -- looking at utility for a
single good is not enough. We want to compare utility for different combinations
of two or more goods.
• Our goal is to be able to graph the utility received from a combination of two
goods with a two-dimensional diagram. We do this using indifference curves.
• An indifference curve represents all combinations of goods that produce the
same level of satisfaction to a person.
o Along an indifference curve, utility is constant.
o Remember that each curve is analogous to a line on a contour map,
where each line shows a different elevation.
