BM: CP4 THEORY OF CONSUMPTION

BUDGET LINE

BUDGET LINE

contains infinite points of combination of commodity items that the same budget can buy at a given price.

CONVERGENCE

often referred to as “catch-up effect” in economics.

INCOME EFFECT

potential increase in the consumption of two commodities.

INDIFFERENCE CURVE

a useful tool for analyzing consumption behavior on utility theory.

ISOCOST LINE

shows all combinations of inputs, which cost the same total amount.

MARGINAL RATE OF SUBSTITUTION

rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility.

MARGINAL UTILITY

additional satisfaction derived from consumption of additional goods and services; also defined as the utility or dissatisfaction from the last unit of consumption.

MASLOW’S THEORY OF MOTIVATION

diagram that explains why people Are driven by particular needs at particular times.

OPTIMUM COMBINATION

implies that a consumer can increase the level of satisfaction, despite a fixed income, by altering the consumption mix.

PARADOX VALUE

discusses why absolute necessities in life (i.e. water) are cheaper as compared to luxuries (i.e. diamonds).

REFERENCE GROUPS

groups that have a direct or indirect influence on persons attitudes or behavior.

SUBSTITUTION EFFECT

an idea that when price increases or income decreases, consumers will replace expensive items with cheaper alternatives.

TOTAL UTILITY (TU)

total amount of satisfaction derived from consuming foods and services.

UTILITY

satisfaction derived from the consumption of a commodity.