Chapter 7 Flashcards
Utility
Want-satisfying power
Total utility
Total amount of satisfaction
Marginal utility
Extra satisfaction a consumer gets from one additional unit of that product. MU= change in TU/units consumed
Law of Diminishing Marginal Utility (MU)
Gains in satisfaction decline as additional units are consumed.
Utility maximization rule
The consumer’s money income should be allocated so that the last dollar spent on each product purchased yields the same amount of extra (marginal) utility
Theory of consumer choice
A typical consumer:
- Exhibits rational behaviour
- Knows clear-cut preferences
- Is subject to a budget constraint
- Responds to price changes
Budget constraint
Limit that a consumer’s income (and the prices that must be paid for goods and services) imposes on the ability of that consumer to obtain goods and services.
Income effect
Impact that a change in the price of a product has on a consumer’s real income and consequently on the quantity demanded of that good.
Substitution effect
Impact that a change in a product’s price has on its relative expensiveness and on the quantity demanded.
The Budget Line
- an increase in income makes the purchase of more of either or both items possible.
- price changes cause a change in the quantity demanded of the items
Indifference Curves
-indifference map shows a series of indifference curves, for different levels of utility.
Equilibrium at Tangency
-point X represents the consumer’s equilibrium position.
Marginal utility theory
Assumes utility is numerically measurable
