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2. KRUGMAN’S
Economics
for AP®
S E C O N D E D I T I O N

3. Section 9
Module 51

4. What You Will Learn in this Module
Describe how consumers make choices about the purchase of goods and services
Explain why consumers’ general goal is to maximize utility
Explain why the principle of diminishing marginal utility applies to the consumption of most goods and services
Use marginal analysis to find the optimal consumption bundle
What You Will Learn in this Module
Section 9 | Module 51

5. Utility: It’s All About Getting Satisfaction
The utility of a consumer is a measure of personal satisfaction.
An individual’s consumption bundle is the collection of all the goods and services consumed by that individual.
An individual’s utility function gives the total utility generated by his or her consumption bundle.
The unit of utility is a util.

6. Cassie’s Total Utility and Marginal Utility
Section 9 | Module 51

7. The Principle of Diminishing Marginal Utility
Cassie’s total utility depends on her consumption of fried clams.
It increases until it reaches its maximum utility level of 64 utils at 8 clams consumed and decreases after that.
The marginal utility curve slopes downward due to diminishing marginal utility; each additional clam gives Cassie less utility than the previous clam.
Section 9 | Module 51

8. The Principle of Diminishing Marginal Utility
The marginal utility of a good or service is the change in total utility generated by consuming one additional unit of that good or service.
The marginal utility curve shows how marginal utility depends on the quantity of a good or service consumed.
The principle of diminishing marginal utility says that each successive unit of a good or service consumed adds less to total utility than the previous unit.
Section 9 | Module 51

9. F Y I Is Marginal Utility Really Diminishing?
Are all goods really subject to diminishing marginal utility? Of course not; there are a number of goods for which, at least over some range, marginal utility is surely increasing.
Example: Downhill skiing, which involves more fear than enjoyment at the start, but then becomes pleasurable after its mastered.
So why does it make sense to assume diminishing marginal utility? Most goods don’t suffer from the above qualifications.
In the relevant range of consumption, marginal utility is still diminishing.

10. Budgets and Optimal Consumption
A budget constraint requires that the cost of a consumer’s consumption bundle be no more than the consumer’s total income.
A consumer’s consumption possibilities is the set of all consumption bundles that can be consumed given the consumer’s income and prevailing prices.
A consumer’s budget line shows the consumption bundles available to a consumer who spends all of his or her income.
Section 9 | Module 51

11. The Budget Line
Section 9 | Module 51

12. Sammy’s Utility from Clam and Potato Consumption
Section 9 | Module 51

13. The Optimal Consumption Bundle
The optimal consumption bundle is the consumption bundle that maximizes a consumer’s total utility given his or her budget constraint.
Section 9 | Module 51

14. Sammy’s Budget and Total Utility
Section 9 | Module 51

15. Optimal Consumption Bundle
Section 9 | Module 51

16. Spending the Marginal Dollar
The marginal utility per dollar spent on a good or service is the additional utility from spending one more dollar on that good or service.
Section 9 | Module 51

17. Sammy’s Marginal Utility per Dollar
Section 9 | Module 51

18. Marginal Utility per Dollar
Section 9 | Module 51

19. Summary Consumers maximize a measure of satisfaction called utility.
Each consumer has a utility function that determines the level of total utility generated by his or her consumption bundle, the goods and services that are consumed.
A good’s or service’s marginal utility is the additional utility generated by consuming one more unit of the good or service.
We usually assume that the principle of diminishing marginal utility holds: consumption of another unit of a good or service yields less additional utility than the previous unit.
Section 9 | Module 51
Section 9 | Module 51

20. Summary
A budget constraint limits a consumer’s spending to no more than his or her income. It defines the consumer’s consumption possibilities, the set of all affordable consumption bundles.
An individual chooses the consumption bundle that maximizes total utility, the optimal consumption bundle.
The optimal consumption rule says that at the optimal consumption bundle the marginal utility per dollar spent on each good and service—the marginal utility of a good divided by its price—is the same.