CH6: The Theory Of Demand: Utility Approach Flashcards
What is utility in economics?
The total satisfaction received from consuming a good or service.
What is marginal utility?
The additional utility gained from consuming one more unit of a product.
What is total utility?
The total satisfaction from all units of a product consumed.
What does the law of diminishing marginal utility state?
Marginal utility decreases as more units of a good are consumed.
What is cardinal utility?
A measurable form of utility using ‘utils’.
What is ordinal utility?
Ranking preferences without assigning numerical values.
What is consumer equilibrium in the utility approach?
When a consumer maximizes total utility and MU/Price is equal across all goods.
What must be true for consumer equilibrium?
All income is spent and weighted marginal utilities are equal.
What is the formula for consumer equilibrium with three goods?
MU_B/P_B = MU_M/P_M = MU_R/P_R
What is weighted marginal utility?
Marginal utility divided by the price of the good (MU/P).
What happens to quantity demanded when price falls, according to utility theory?
Quantity demanded increases because MU/P increases.
What is the effect of a price decrease on a normal good?
Both substitution and income effects increase quantity demanded.
What is the effect of a price decrease on an inferior good (non-Giffen)?
Substitution effect increases Qd, income effect decreases it, but total Qd still rises.
What is a Giffen good?
An inferior good where a price drop causes total quantity demanded to fall.
How is a demand curve derived from utility theory?
By showing how a consumer reallocates spending when the price of a good changes.
Why is the utility approach useful in understanding consumer behavior?
It explains how consumers make choices to maximize satisfaction under constraints.
