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Microeconomics CH 7
Vocab
9
Economics
Undergraduate 1
02/10/2009

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Term
Law of Diminishing Marginal Utility
Definition
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.
Term
Utility
Definition
The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service.
Term
Total Utility
Definition
The total amount of satisfaction derived from the consumption of a single product or a combination of products.
Term
Marginal Utility
Definition
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.
Term
Rational Behavior
Definition
Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.
Term
Budget Constraint
Definition
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.
Term
Utility-Maximizing Rule
Definition
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.
Term
Income Effect
Definition
A change in the quantity demanded of a product that results from a change in the real income caused by a change in the product's price.
Term
Substitution Effect
Definition
(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 product's price; (2) the effect of a change in the price of a resource on the quantity of the resource employed by a firm, assuming no change in its output.
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