Chapter 9
Getting to Know Homo
Economicus, the Utility-Maximizing Consumer
In this chapter, I get into the nitty gritty behind the demand curve by
explaining how economists analyze how people should go about making
decisions about what to buy and consume given their limited budgets of time
and money. They key concept is marginalism--approaching a budget
problem by thinking of it in terms of the best possible use of your next
(i.e. marginal) dollar.
Here is
an excellent little page at
Robert Shenck's great website explaining with a nice couple of graphs
how using marginal thinking is the best way to maximize the net benefits
that you can get when making any decision. Also definitely read
Robert Murphy's
nice short article on marginalism and the very famous Diamond Water Paradox
that is very easily resolved using marginal thinking.
Robert Shenck's also got a nice short page to hammer
home the idea that you should equalize the marginal utility per dollar spent
on all the goods you are considering consuming if you want to make yourself
as happy as possible. He evenn gives the idea the slick name of
The Equimarginal Principle. I like
that.
Finally, if you want to
read up on the intellectual history of marginalism, go check out this
excellent page with lots of links at the "enpsychlopedia"
run by Dr. John Grohol's PsycheCentral.com. Yes, I know it's
embarrassing that I'm sending you off to a site run by a psychologist rather
than an economist. But it's really sharp!
At the end of the chapter, there's a sidebar about how
the demand curves for a particular good can be affected by that good's
complimentary goods and substitute goods. Here's a nice essay by
Stephanie Liu dealing with substitute and
complimentary goods. It won her second place in an essay contest for
high school students run by the Federal Reserve Bank of Dallas.
Winkipedia.com has decent pages on
substitute goods and
complimentary goods that would be helpful
to read, however,
in general, winkipedia.com is very dangerous because
it's a publicly edited encyclopedia and anybody can change the text.
This ends up meaning that many of the pages are hugely ideologically biased
and misleading, as the people with the biggest axes to grind simply keep
changing the text to make it the way they want. But for less
controversial things like the definitions of substitute and complimentary
goods, it's often OK. That being said, their definitions at
winkipedia.com may have become wacko since I posted these links. So read
with caution.
