Unit 4: Consumer Theory and Equilibrium
This unit addresses the other main agent in microeconomics--the individual consumer. Similar to firms, individuals face constraints in the form of a budget. Time, available resources, and options are not static and make individual economic analysis challenging. Individuals also have unique preferences, and there is no one direct path to utility maximization.
Microeconomists make a number of underlying assumptions about consumer behavior and choices to construct mathematically elegant models. As each of the assumptions is relaxed, a more realistic paradigm of individual behavior emerges. When learning an economic model, first accept the assumptions and then consider how they might be modified.
General equilibrium brings together the problems of the firm and the individual. Equilibrium answers the questions at what price and quantity will consumers and firms make exchanges. Of note, an equilibrium may not always exist; alternative allocation mechanisms can be considered.
Completing this unit should take you approximately 12 hours.
Upon successful completion of this unit, you will be able to:
- develop skills in doing economic analysis for consumer theory using calculus; and
- analyze the economic behavior of individuals and firms, and explore how they respond to changes in the opportunities and constraints that they face and how they interact in markets.
4.1: Consumer Theory
Read this chapter. What is the role of utility (the flow of happiness over time)? Do individuals truly maximize their happiness relative to a budget?
Watch these videos. The associated spreadsheet for this video is the fourth one in this workbook. Explore the various changes caused by the income and substitution effects.
4.2: Applied Consumer Theory
Read this chapter. Reflect on how environments change and how individuals adapt to evolving circumstances. How do consumers adapt as they learn new information?
Listen to Lecture 4.
4.3: Equilibrium
Read this chapter. Consider a zero-sum game. Is it always true that to make one person better off another must be made worse off?
Unit 4 Assessment
- Receive a grade
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.