Budget Constraint Model and Utility Analysis

These flashcards cover key concepts related to the budget constraint model, utility, and consumer behavior based on lecture notes.

Budget Constraint Model

A graphical representation of the combinations of goods a consumer can purchase given their income and the prices of the goods.

Marginal Utility (MU)

The additional satisfaction gained from consuming one more unit of a good.

Total Utility (TU)

The total satisfaction received from consuming a certain quantity of goods.

Law of Diminishing Marginal Utility

As a person consumes more units of a good, the additional satisfaction gained from each extra unit decreases.

Substitution Effect

When the price of a good increases, consumers shift consumption to cheaper alternatives.

Income Effect

The change in consumption resulting from a change in real income when the price of a good changes.

Utility Maximizing Rule

Consumers reach the highest utility when the ratio of marginal utility to price is equal across all goods.

Normal Good

A good for which demand increases when consumer income rises.

Inferior Good

A good for which demand increases when consumer income falls.

Giffen Good

A rare type of inferior good for which an increase in price leads to an increase in quantity demanded.

Utility Maximizing Bundle

The combination of goods that maximizes a consumer's total utility given their budget constraint.

Consumption Choice

The decision made by consumers on how much of each good to purchase within their budget.