1
Q
Utility
A
The satisfaction received from consumption
2
Q
Law of Diminishing Marginal Utility
A
Consumption increases, satisfaction from consumption decreases
3
Q
Equi-Marginal Principle
A
Consumers maximise utility where their Marginal valuation for each product consumed is the same
4
Q
Budget Line
A
Combination of two goods that can be purchased with given income at given prices
5
Q
Two causes in shift of budget line
A
- Income Effect
- Substitution Effect
6
Q
Income effect
A
Following a price change, consumer has higher real income and purchases more
7
Q
Substitution Effect
A
Following a price change, consumer substitutes to cheaper good
8
Q
Giffen Good
A
Inferior good; when quantity demanded falls, price falls and quantity demanded increases as price increases
9
Q
Limitations of Indifference curves
A
- Consumers have more options to choose from in reality
- Assumes that consumers act rationally
