Term
| The Economic Model of Consumer Behavior: |
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Definition
| predicts that consumers will choose to buy the combination of goods and services that makes them as well off as possible from among all the combinations that their budgets allow them to buy. |
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Term
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Definition
| the enjoyment or satisfaction that people receive from consuming goods and services |
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Term
The Principle of Diminishing Marginal Utility:
Marginal Utility: |
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Definition
| (MU) The change in total utility a person receives from consuming one additional unit of a good or service. |
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Term
The Principle of Diminishing Marginal Utility:
Law of Diminishing Marginal Utility: |
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Definition
| The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time |
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Term
Utility and Consumer Decision Making:
Budget Constraint: |
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Definition
| the limited amount of income available to consumers to spend on goods and services |
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Term
Utility and Consumer Decision Making:
Two Conditions for Maximizing Utility:
(pizza/coke example) |
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Definition
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Ppizza=Pcoke
- spending on pizza+spending on coke= amount available to spend
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Term
Utility and Consumer Decision Making:
Income Effect of a Price Change: |
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Definition
| the change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant |
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Term
Utility and Consumer Decision Making:
Substitution Effect of a Price Change: |
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Definition
| the change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power |
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Term
The Income Effect and Substitution Effect of a Price Change:
Price Decreases: Increases the Consumers Purchasing Power, which.......
Income Effect: |
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Definition
- If normal good, causes the quantity demanded to increase
- if inferior good, causes the quantity demanded to decrease
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Term
The Income Effect and Substitution Effect of a Price Change:
Price Decreases: Increases the Consumers Purchasing Power, which.......
Substitution Effect: |
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Definition
| lowers the opportunity cost of consuming the good, which causes the quantity of the good demanded to increase |
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Term
The Income Effect and Substitution Effect of a Price Change:
Price Increases: Decreases the Consumers Purchasing Power, which.......
Income Effect: |
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Definition
- If normal good, causes the quantity demanded to decrease
- if inferior good, causes the quantity demanded to increase
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Term
The Income Effect and Substitution Effect of a Price Change:
Price Increases: Decreases the Consumers Purchasing Power, which.......
Substitution Effect: |
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Definition
| raises the opportunity cost of consuming the good, which causes the quantity of the good demanded to decrease |
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Term
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Definition
| the amount of satisfaction received from all of the units of a good or service consumed |
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Term
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Definition
| is finding that combination of goods that is affordable and yields the highest total utility |
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Term
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Definition
| the key assumption is that the household chooses the consumption possibiltity that maximizes total utility (getting the most utility for your money) |
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Term
| Total Utility is Maximized when.... |
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Definition
| a combination of goods (X1,X2,...,Xn) is chosen that is "on" the budget constraint AND one's preferences are such that [MU1/P1]=[MU2/P2]=...=[MUn/Pn] for the last good consumed |
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Term
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Definition
| a condition in which total utility cannot increase by spending more of a given budget on one good and spending less on another good |
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Term
| Marginal Utility per dollar spent: |
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Definition
| is the marginal utility from a good divided by its price |
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Term
Law of Demand and Utility Theory:
Three Reasons the Demand Curves Slope Downwards: |
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Definition
- Substitution Effect
- Income Effect
- Principle of Diminishing Marginal Utility
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Term
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Definition
| income measured in terms of money: not in terms of what money can buy |
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Term
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Definition
| the buyer power of a consumer's budget; determined by the consumer's money income and the prices of goods and services |
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Term
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Definition
goods that have upward sloping demand curves. a giffen good is an inferior good on which consumers spend a large fraction of their incomes such that their income effect is greater than their substitution effect.
no giffen goods have ever been proven to exist. |
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Term
| We can predict the price elasticity of demand for a good by knowing the characteristics of the: |
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Definition
| marginal utility of the good |
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Term
| If the Marginal Utility diminishes rapidly as the quantity consumed increases, then..... |
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Definition
| ....a given price change requires a small change in order for the consumer to restore his/her consumer equilibrium. in this case the demand is inelastic. |
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Term
| If the Marginal Utility diminshes slowly as the quantity consumed increases, then..... |
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Definition
| .....a given price change requires a large quantity change in order for the consumer to restore his/her consumer equilibrium. in this case demand is elastic. |
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Term
| When consumers maximize their utility, they are using resources.... |
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Definition
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Term
The Paradox of Value:
(the water/diamond theory) |
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Definition
| "why is water, which is essential to live, far cheaper than diamonds, which are not essential to live?" |
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