Chapter 6 - Household Behavior and Consumer Choice Flashcards
budget constraint
The limits imposed on household choices
by income, wealth, and product prices.
choice set or opportunity
set
The set of options that is defined and limited by a budget constraint.
real income
The set of opportunities to purchase real goods and services available to a household as determined by prices and money income.
utility
The satisfaction a product yields
marginal utility (MU)
The additional satisfaction gained by the consumption or use of one more unit of a good or service.
total utility
The total amount of satisfaction obtained from consumption of a good or service.
law of diminishing marginal utility
The more of any one good consumed in a given period, the less satisfaction (utility) generated by consuming each additional (marginal) unit of the same good.
utility-maximizing rule
Equating the ratio of the marginal utility of a good to its price for all goods.
diamond/water paradox
A paradox stating that (1) the things with the greatest value in use frequently have little or no value in exchange and (2) the things with the greatest value in exchange frequently have little or no value in use.
labor supply curve
A curve that shows the quantity of labor supplied at different wage rates. Its shape depends on how households react to changes in the wage rate.
financial capital market
The complex set of institutions in which suppliers of capital (households that save) and the demand for capital (firms wanting to invest) interact.
Indifference curve
A set of points, each point representing a combination of goods X and Y, all of which yield the same total utility.
Marginal rate of substitution
MU(sub X) /MU (sub Y); the ratio at which a household is willing to substitute good Y for good X.
Preference map
A consumer’s set of indifference curves
