Microeconomics: Consumer Choice and Behavioral Economics

Comprehensive vocabulary flashcards covering utility theory, consumer choice, behavioral economics, and indifference curve analysis based on Chapter 10 of Microeconomics.

Utility

The enjoyment or satisfaction that people receive from consuming goods and services.

Marginal Utility ($MU$)

The change in total utility a person receives when consuming one additional unit of a good or service.

Law of Diminishing Marginal Utility

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

Budget Constraint

The limited amount of income available to consumers to spend on goods and services.

Marginal Utility per Dollar Spent

The rate at which a good allows the consumer to transform money into utility, calculated by dividing the marginal utility ($MU$) of the item by its price ($P$).

Rule of Equal Marginal Utility per Dollar Spent

The condition for utility maximization stating that consumers should allocate spending across goods such that $\frac{MU_1}{P_1} = \frac{MU_2}{P_2}$ while completely exhausting their budget.

Income Effect

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.

Substitution Effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Giffen Good

A good with an upward-sloping demand curve, occurring when an inferior good comprises a very large portion of consumers' budgets and has an income effect that exceeds the substitution effect.

Network Externalities

Situations in which the usefulness of a product increases with the number of consumers who use it.

Experimental Economics

A field of economics that evaluates consumer decision making by conducting laboratory experiments with human subjects who receive monetary rewards based on their choices.

Ultimatum Game

An experimental game where an allocator proposes a split of money between themselves and a recipient; if the recipient accepts, both receive the proposed amounts, but if rejected, both receive nothing.

Dictator Game

A variation of the ultimatum game in which the allocator chooses a split of money with a recipient who has no option to reject the offer.

Behavioral Economics

The field of economics that studies situations in which people make choices that do not appear to be economically rational.

Opportunity Cost

The highest-valued alternative that must be given up to engage in an activity.

Endowment Effect

The tendency of people to be unwilling to sell a good they already own even if they are offered a price greater than what they would be willing to pay to buy it if they did not own it.

Sunk Cost

A cost that has already been paid and cannot be recovered, which rational actors should ignore in future economic decisions.

Rules of Thumb

General decision-making guidelines adopted by consumers that save decision-making time and often, but not always, yield optimal results.

Anchoring

A behavioral phenomenon in which irrelevant information or arbitrary baselines influence consumer judgment and purchasing behavior.

Complete Preference

A condition of rational preference where, for any two bundles $A$ and $B$, an agent can consistently determine whether $A \succ B$, $B \succ A$, or $A \sim B$.

Transitive Preference

A condition of rational preference stating that if bundle $A$ is preferred to bundle $B$, and bundle $B$ is preferred to bundle $C$, then bundle $A$ must be preferred to bundle $C$.

Indifference Curve

A curve showing combinations of consumption bundles that make the consumer equally well-off by providing the exact same level of total utility.

Marginal Rate of Substitution ($MRS$)

The rate at which a consumer is willing to trade off one product for another while keeping utility constant, graphically represented by the slope of an indifference curve.