Utility Flashcards
What is utility?
The satisfaction that consumers gain from consuming something.
What is the measurement of utility?
util
What is the difference between total utility and marginal utility?
total satisfaction vs. extra satisfaction
How do you calculate marginal utility?
MU=(TUf-TUi)/(Qf-Qi)
Marginal utility = total utility final - total utility initial / quantity of units consumed final - quantity of units consumed intial
What is the sunk cost?
Irrational decisions that make suboptimal outcomes
e.g. dollar auction game = wagering for war
What is the sunk cost fallacy?
When you think about past costs when making current decisions.
What is the opportunity cost?
The value of the next best alternative, or what you give up to get your desired choice.
Why do people constantly face tradeoffs?
scarcity
What is the law of diminishing marginal utility?
as a person consumes more of an item or product, the satisfaction (utility) they derive from the product wanes
What is the substitution effect?
if the price of a good decreases, the consumer buys more of it. QD increases.
If the price of the original product decreases, the demand for the substitution product decreases. The substitution curve shifts left.
What is the income effect?
If the price of a good decreases, a consumer’s real income increases (how much they can afford to purchase).
This is a non-price determinant so the demand curve moves but the price does not change.
What is nominal income?
Cash purchasing power
