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Microeconomics for Today 5th E
Chap. 6 Consumer Choice Theory
9
Economics
Undergraduate 2
03/05/2008

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Term
Utility
Definition
The Satisfaction, or pleasure that people receive from consuming a good or service.[image]
Term
Total Utility
Definition
The amount of satisfaction received from all the units of a good or service consumed.
Term
Marginal Utility
Definition
The change in total utility from one additional unit of a good or service
Term
Law of dimishing marginal utility
Definition
The principle that the extra satisfaction of a good or service declines as people consume more in a given period.
Term
Consumer Equilibrium
Definition
The condition in which total utility cannot increase by spending more of a given budget on one good and spending less on another good.
Term
Income Effect
Definition

The change in quantity demanded of a good or service caused by a change in real income (purchasing power).

 

This effect also occurs when items are on sale.  The amount budgeted for a specific item, when that item is on sale, (in effect) increases, therefore allowing us to purchase more of that item. 

Term
Substitution Effect
Definition

The change in quantity demanded of a good or service caused by a change in its price relative to substitutes.

 

If the cost of Dove soap increases, demand for Ivory soap  will increase if they are substitutes.

 

Price of competing good Y rises -> Consumers switch from good Y to good X -> Quantity of good X demanded increases.

Term
What about normal goods?
Definition
When the price of a normal good falls, the income effect and the substitution effect combine to cause the quantity demanded to increase.
Term
Further info on Consumer Equilibrium
 
Definition

The condition of reaching max level of satisfactio, given a budget when the MU(marginal utility) per dollar spent on each good purchased is equal.

Consumer Equilibrium and the law of diminishing MU can be used to derive a downward-sloping demand curve.  When price of a good falls, consumer equilibrium no longer holds, because the mu/$ for the good rises. 

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