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positive analysis
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statements that describe the relationship of cause and effect
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normative analysis
answer
analysis examining what ought to be
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normal goods
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positive relationship between income and demand
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inferior goods
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when income increases, demand falls
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luxury goods
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when income increases, more than proportional increase in demand
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marginal utility
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the extra utility obtained from slightly more X1, all else constant
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marginal rate of substitution
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the amount of one good a consumer will give up to obtain more of another good
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utility maximization
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utility is maximized where the indifference curve is tangent to the budget constraint
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Engel curves
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relate the quantity of good consumed to income
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price consumption curve
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traces out the utility maximizing market basket for each price of food
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income consumption curve
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traces out the utility maximizing market basket for each level of income
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substitution effect
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the change in an item's consumption associated with a change in the price of the item, level of utility held constant
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income effect
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the change in an item's consumption brought about by the increase in purchasing power, price of the item held constant
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Giffen good
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when the income effect is large enough to cause the demand curve for a good to slope upwards
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