Meet Alice. Her dad gave her $8 to buy snacks. She loves chocolate bars and strawberries, and she wants to find the right amount of strawberries and chocolate for her perfect snack given that she just has $8.
This chapter has one main goal: maximizing utility. Getting there requires understanding the following:
- Budget Constraint — Alice cannot spend more than what she has
- Marginal Rate of Transformation — On the market, a strawberry is worth a certain amount chocolate
- Utility Function — Each combination of chocolate and strawberries gives Alice some utility
- Marginal Rate of Substitution — Alice may accept to exchange some of her strawberries for some chocolate, as to her, a strawberry is worth a certain amount of chocolate
- Utility Maximization — Alice maximizes utility when her value for one of her strawberries in terms of chocolate is the same as the market
- Demand — Alice is able to figure out the amount of chocolate and strawberries she will buy
How can this help you?
Think about the last time you bought video games, sports equipment for your workout routine, or fast food that offset the workout you did. You had a limited amount of money to spend, many items to choose from, and each had a price. There were so many possibilities, yet you made a choice: You maximized your utility.