Microeconomics Chapter 13 Consumer Choice and Demand

Describes the limits to consumption choices and depends on the consumer's budget and the prices of goods and services.

Slope remains the same because prices of the actual goods do not change.

Consumption possibilities expand

Consumption possibilities shrink

Consumption possibilities expand

Opportunity Cost

The price of one good in terms of another good

The price of one good divided by the price of another, which is equal to the slope of the budget line.

The benefit or satisfaction that a person gets from the consumption of a good or service.

The total benefit that a person gets from the consumption of a good or service.

Total Utility also increases

Change in the total utility that results from a one unit increase in the quantity of the good consumed.

General tendency for marginal utility to decrease when the quantity of a goods consumed increases.

Finding a point on the budget line that at which the sum of utilities received from all goods is as large as possible.

1. Allocate the entire available budget.
2. Make the marginal utility per dollar equal for all goods.

Amount left over after figuring out what to save and what to spend on other items.

The marginal utility from a good relative to the price paid for the good. (MU / $ paid for good)

The consumer is using his or her resources efficiently.

The maximum price a consumer is willing to pay for an extra unit of a good or service when total utility is maximized.

Water is vital for life but cheap; Diamonds are very expensive and a decoration. Total utility tells us about relative value. Marginal utility tells us about relative price. The marginal utility per dollar spent is the same for diamonds as for water.

Measures value in excess of the amount paid.

Is the rate at which a person will give up good y (the good measured on the y-axis) to get more of good x (the good measured on the x-axis) and at the same time remain on the same indifference curve.

Is the general tendency for the marginal rate of substitution to decrease as the consumer moves down along the indifference curve, increasing consumption of good x and decreasing consumption of good y.