Lesson Plan - Consumer Choice



I. Definitions

- types of commodities
- goods vs bads
- goods vs services
- utility = satisfaction
- can it be accurately measured?
- ordering of preferences?
- comparisons between individuals?
- why use utility analysis?
- Predictions of the analysis are useful in predicting how individuals actually behave.
- total utility and marginal utility
- what does marginal mean? the idea of marginal is an important concept and will be used in this and other models throughout the rest of the semester.
- the law of diminishing marginal utility.
- why is the "law" realistic?
- examples
- graphical relationship between total utility and marginal utility.

II. Maximizing utility

- economists assume that consumers buy goods and services in an attempt to maximize their total utility.
- how do consumers maximize total utility?
- define MU/P (the marginal utility of a good divided by the good's price).
- what does this equation mean?
- the principle of equal marginal utilities per $ spent.
- numerical example
- marginal utility and demand
- if utility is measured in $ => marginal utility ~ Demand.
- consumer surplus
- definition
- the existence of consumer surplus
- graphically
- in the real world (do you ever pay less for a good/service than you would have been willing to pay?)
- rationality/realism of the utility model
- do consumers actually maximize their utility by buying goods to equate the marginal utility per $ spent for all commodities? do you?
- the usefulness of the model, predicting consumer behavior with the model
- what does the model says happens if the price of a good falls?
- why does Q consumed increase?
- income and substitution effects
- examples