After you have worked through this section of the learning unit, you should be able to:
- describe the concept marginal utilities per rand
- describe the concept consumer equilibrium
- use an example explain how a consumer with an income constraint reaches consumer equilibrium
The aim of a consumer is to spend his or her income, given the prices of goods and services, in such a way that he or she attains the highest possible total utility. Once this happens, we can say that the consumer is in equilibrium – that is, utility maximisation has occurred.
In making the decision on how utility maximisation is to be reached, the consumer needs to take the following into account:
- the utility (satisfaction) he or she gains from consuming goods and services
- the prices of goods and services
- his or her income
The price of the goods or services and income are the constraints that the consumer faces, and it is because of these constraints that the consumer must attempt to maximise utility.
Help Fiona maximise her satisfaction.
Fiona provides the following information on the marginal utility she obtains from eating ice cream and a chocolate.
The marginal utility of a chocolate is 72.
The marginal utility of ice cream is 100.
If she is offered chocolate and ice cream for free (income and prices are not constraints) and she must choose between the two, which one do you think she should choose?
In this case, she should choose the ice cream since it gives her more additional utility than the chocolate.
However, for most of us to have a chocolate or ice cream, we must pay for it.
Let's see what happens to Fiona's choice if she has to pay for the ice cream and chocolate.