Chapter 9: Consumer Choice and Demand

This set covers vocabulary and core concepts from Chapter 13 including budget lines, utility theory, the paradox of value, and indifference curve analysis.

Budget Line

A line that describes the limits to consumption choices and depends on a consumer’s budget and the prices of goods and services; it separates affordable combinations from unaffordable combinations.

Relative Price

The price of one good in terms of another good, calculated as the price of one good divided by the price of another good; it equals the opportunity cost and the slope of the budget line ($P_x / P_y$).

Utility

The benefit or satisfaction that a person gets from the consumption of a good or service.

Total Utility (TU)

The total benefit that a person gets from the consumption of a good or service, which generally increases as the quantity consumed increases.

Marginal Utility (MU)

The change in total utility ($TU$) that results from a one-unit increase in the quantity ($Q$) of a good consumed, calculated as $MU = \frac{\Delta TU}{\Delta Q}$.

Principle of Diminishing Marginal Utility

The general tendency for marginal utility to decrease as the quantity of a good consumed increases.

Utility-Maximizing Rule

The rule stating that a consumer maximizes total utility by allocating the entire available budget and making the marginal utility per dollar equal for all goods.

Marginal Utility Per Dollar ($MU/P$)

The marginal utility from a good relative to the price paid for it, calculated as $\frac{MU}{\text{Price}}$.

Marginal Benefit

The maximum price a consumer is willing to pay for an extra unit of a good or service when total utility is maximized.

Paradox of Value

The puzzle where essential goods like water have a low price because they are abundant (low marginal utility), while non-essential goods like diamonds have a high price because they are scarce (high marginal utility).

Consumer Surplus

A measurement of value in excess of the amount paid for a good or service, represented by the area under the demand curve above the market price.

Indifference Curve

A line on a preference map that shows combinations of goods among which a consumer is indifferent and equally happy.

Marginal Rate of Substitution (MRS)

The rate at which a person will give up the good measured on the y-axis to get more of the good measured on the x-axis while remaining on the same indifference curve; it equals the magnitude of the slope of the indifference curve.

Diminishing Marginal Rate of Substitution

The general tendency for the marginal rate of substitution to decrease as the consumer moves down along an indifference curve, increasing consumption of the good on the x-axis.

Consumer Equilibrium

The best affordable point for a consumer where the budget line is tangent to the highest attainable indifference curve, resulting in the maximum possible utility.