Chapter 10: The Rational Consumer Flashcards
Utility
measure of the satisfaction the consumer derives from consumption of goods and services.
Consumption Bundle
collection of goods and services consumed by an individual
Utility Function
gives the total utility generated by his/her consumption bundle
Utils
unit of utility
Marginal Utility
change in total utility generated by consuming one additional unit of that good or service
Marginal Utility Curve
shows how marginal utility depends on quantity of a good/service consumed
Budget Constraint
requires that the cost of a consumer’s consumption bundle be no more than the consumer’s income
Consumption Possibilities
set of all consumption bundles that can be consumed given the consumer’s income and prevailing prices
Budget Line
shows consumption bundles available to a consumer show spends all of his/her income
-slopes downward like PPF
Optimal Consumption Bundle
point on budget line that maximizes total utility
Marginal Utility Per Dollar
additional utility from spending one more dollar on good/service
Utility-Maximizing Principle of Marginal Analysis
Marginal Utility/ Per dollar spent must be same for all goods in the optimal consumption bundle
Substitution Effect
change in quantity of that good consumed as the consumer substitutes other goods that are now relatively cheaper in place of that good that has become relatively more expensive
Income Effect
change in quantity of good consumed that results from a change in the consumer’s purchasing power due to change in price of good
Giffen Good
hypothetical inferior good for which the income effect outweighs the substation effect and demand curve slopes upward
-ex/ Potato Famine in 19th century Ireland, a rise in price of potatoes, an inferior good, led to an increase in quantity demanded
