Chapter Summary

Using the "opportunity cost" principle, we can measure the benefits from consumption, in money terms. We measure the benefits from consuming a particular good by the market value of the other goods the consumer is willing to give up to get the particular good. The benefits increase at a decreasing rate as the quantity consumed increases; so we have a "law of diminishing marginal benefit. "

In order to maximize the net benefits from consumption of a good or service -- or, in other terms, to realize 100% of the potential benefit -- the consumer will adjust the quantity consumed so that the marginal benefit is just equal to the price paid. Economists regard this maximization as "rational" choice among consumer goods. This leads to the

Fundamental Principle of Consumers' Demand:: The demand curve for any product or service is identical with the marginal benefit curve for that good or service.

Using this principle, and applying it to market demand as well as individual demand, we can better understand many aspects of demand. As an example, we use the concept of consumers' surplus -- the area between the price line and the demand curve in a demand diagram -- as a measure of the consumers' net benefits in cost-benefit analysis.

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