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Law of diminishing marginal utility
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The law that states that added satisfaction declines as a consumer acquires additional units of a given product
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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
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1. "utility" and "usefulness" are not synonymous
2. Utility is subjective
3. Utility is difficult to quantify
2. Utility is subjective
3. Utility is difficult to quantify
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What are the 3 characteristics of utility?
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Utils
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Units of utility
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Total utility
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The total amount of satisfaction or pleasure a person derives from consuming some specific quantity
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Marginal utility
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The extra satisfaction a consumer realizes from an additional unit of that product; the change in total utility that results from the consumption of 1 or more unit of a product
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Demand
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The law of diminishing marginal utility explains why the ___________ curve slopes downward.
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peak; zero
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When total utility reaches its ____________, marginal utility is ____________.
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1. Rational behavior (wants to get "the most for their money")
2. Preferences
3. Budget constraint (fixed, limited budget)
4. Prices
2. Preferences
3. Budget constraint (fixed, limited budget)
4. Prices
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List the typical assumptions of consumer behavior.
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Utility-maximizing rule
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To maximize satisfaction, the consumer should allocate their money income so that the last dollar spent on each product yields the same amount of marginal utility. This rule is the...
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Consumer equilibrium
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The combination of goods purchased that maximizes total utility by applying the utility-maximizing rule.
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Income effect
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He 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
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Substitution effect
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The impact that a change in the product's price has on its relative expansiveness and consequently on the quantity demanded
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The utility-maximizing rule and the demand curve are logically consistent. Because marginal utility declines, a lower price is needed to induce the consumer to buy more of a particular product.
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Explain how a demand curve can be derived by observing the outcomes of price changes in the utility-maximization model.
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Budget constraint
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A schedule or curve showing various combinations of two products a consumer can purchase with a specific money income
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1. Income changes
2. Price changes
2. Price changes
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What 2 things can affect the budget line?
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Indifference curve
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Reflects "subjective" information about consumer preferences; shows all the combinations of 2 products that will yield the same total satisfaction or total utility to a consumer; consumer will be "indifferent" or real not care as to which combination is actually obtained
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1. They are downward sloping
2. They are convex to the origin
2. They are convex to the origin
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What are the characteristics of indifference curves?
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Marginal rate of substitution (MRS)
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The rate at which a consumer is willing to substitute one good for another (from a given combination of goods) and remain equally satisfied (have the same total utility); equal to the slope of a consumer's indifference curve at each point on the curve
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Indifference map
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A set of indifference curves, each representing a different level of utility, that together show the preferences of a consumer
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Equilibrium position
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In the indifference curve model, the combination of 2 goods at which a consumer maximizes his or her utility, given a limited amount to spend
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MRS = Price of B / Price of A
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The consumer's optimal or equilibrium position is the point where ____________.
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