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law of diminishing marginal utility
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the principle that as a consumer increases the consumption of a good or service, the marginal utility obtained from each additional unit of the good or service decreases.
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utility
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the want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services)
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total utility
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the total amount of satisfaction derived from the consumption of a single product or a combination of products
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marginal utility
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the extra utility a consumer obtains from the consumption of 1 additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.
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rational behavior
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human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.
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budget constraint
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the limit that the size of 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.
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utility-maximizing rule
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the principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility
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income effect
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a change in the quantity demanded of a product that results from the change in real income (purchasing power) caused by a change in the product's price.
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substitution effect
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a change in the quantity demanded of a consumer good that results from a change in its relative expensiveness caused by a change in the product's price.
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reflexivity
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If consumer has 2 identical bundles Then A is equally preferred to B
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Transitivity
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A is preferred to B and B to C then A is preferred to C.....graphically represented by indifference curves
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Indifference curves
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consumption bundles that leave the consumer equally satisfied.....Indifference curves representing distinct levels of preferences can not cross
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(1,1) Indifference curve
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parallel downward sloping linear curves with slope of -1. Show with an arrow the direction of more desirable bundles (curves with higher utility)
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Perfect Substitutes
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consumer willing to substitute one good for the other at a constant rate, it color does not matter then only the total number they exchange on a one to one basis
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Indifference curves (perfect substitutes)
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Indifference curves are parallel downward sloping curves with slope -1
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Perfect Complements
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goods consumed together in fixed proportions....ie ; left and right shoes.
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Bads
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commodity that the consumer does not like...give the consumer extra X the indifference curves slope upward.
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Neutrals
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You dont mind having it but dont care. the ....indifference curves are vertical if the good, y, is neutral
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Bliss point-Satiation
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bundle that is just the best, being further away makes you worse off
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