Microeconomics Chapter 7 and Appendix

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. Added satisfaction declines as a consumer acquires additional units of a given product. Explains why the demand curve for a given product slopes downward.

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 the consumption of a collection of goods and services). Not synonymous with usefulness; is subjective (varies widely from person to person); difficult to quantify.

Total amount of satisfaction derived from the consumption of a single products or a combination of products.

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.

Assumes that with limited income and a set of product prices, consumers make rational choices on the basis of well-defined preferences. The following dimensions apply: rational behavior, preferences, budget constraint, and price.

Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility. When consumers that to get "the most for their money" (maximize total utility).

Consumers have a good idea of how much marginal utility they will get from successive units of various products they might purchase. Each consumer has clear-cut preferences for specific goods and services that are available in the market.

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. At any point in time the consumer has a fixed, limited amount of money income; earns only limited income; every consumer faces it.

Goods are scarce relative to the demand for them, so every good carries a price tag. We assume that the price of each good is unaffected by the amount of it that is bought by any particular person.

The principle that to obtain the greatest total utility, a consumer should allocate money income so that the last dollar spent on each good or service yields that same marginal utility (MU).
(For two goods X and Y, with prices P[x] and P[y], total utility will be maximized by purchasing the amounts of X and Y such that MU[x] / P[x] = MU[y] / P[y] for the last dollar spent on each good.

In marginal utility theory, the combination of goods purchased that maximizes total utility by applying the utility-measuring rule. In indifference curve analysis, the combination of goods purchased that maximizes total utility by enabling the consumer to reach the highest indifference curve, given the consumer's budget line (or budget constraint).

By considering alternative prices at which a good or service might be sold and then determining the quantity a consumer will purchase.

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. (Affects the quantity demanded as well).

(1) 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 good's own price; (2) the reduction in the quantity demanded of the second of a pair of source falls and causes firms that employ both resources to switch to using more of the first resource (whose price has fallen) and less the second resource (whose price has remained the same).
The inverse relationship between price and quantity demanded that is illustrated along the demand curve.

Some "essential" goods have much lower prices than some "unimportant" goods.

Theory of consumer behavior that have been generalized to account for the economic value of time. The highest valued alternative that is given up in order to engage in one activity instead of another.

A line that shows the different combinations of two products a consumer can purchase with a specific money income, given the products' prices.

A curve showing the different combinations of two products that yield the same satisfaction or utility to a consumer.

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.

A set of indifference curves, each representing a different level of utility, that together show the preferences of a consumer.

In the indifference curve model, the combination of two goods at which a consumer maximizes his or her utility (reaches the highest attainable indifferent curve), given a limited amount to spend (a budget constraint).

Utility-Maximizing Rule

Less and less

B; A

Low; high

a valuable

Marginal utility analysis

marginal; divided

Income effect and substitution effect

price

Utility; usefulness

The consumer's tastes and preferences continually change within the period studied

Measures the change in the quantity demanded of a good from a change in its relative price

False