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Optimization Principle

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PPGPortal > Home > Concept Dictionary > N, O > Optimization Principle
 

Optimization Principle  

The principle which holds that consumers will always choose the consumption bundle which maximizes their happiness or utility, given their available budget.

(Varian, Hal R. 2010. Intermediate Microeconomics: A Modern Approach, 8th ed. New York: W.W. Norton.)

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At the heart of consumer theory in economics is the assumption that consumers are rational, utility-maximizing individuals who will make the choices that make them happiest, given their available resources. For example, in a two good model in which a consumer has a budget of $100, we assume he will choose, of all the affordable bundles, the combination of Good A and Good B which makes him happiest.

Another way of expressing this same point is that the consumer will buy the combination of goods which places him on the highest possible indifference curve. For this reason, when we are illustrating an optimal choice graphically, the optimal consumption position is where an indifference curve is tangent to the budget line.

     

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