Chapter 6: Consumer Choices — Vocabulary

Vocabulary flashcards covering key terms from Chapter 6: Consumption Choices, including traditional and behavioral economics concepts.

Utility

Satisfaction or happiness obtained from consuming goods and services.

Total utility

The overall level of satisfaction from consuming a given quantity of goods.

Marginal utility

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

Law of diminishing marginal utility

As more units are consumed, the extra satisfaction from each additional unit falls.

Budget constraint

All affordable combinations of two goods given income and prices.

Budget constraint intercepts

Points where the budget line crosses the axes, indicating the maximum of one good when the other is zero.

Utility maximization

Choosing a bundle that yields the greatest total utility within the budget.

Marginal utility per dollar

MU divided by the price, guiding how spending is allocated.

Consumer equilibrium

The condition where the last dollar spent on each good yields equal marginal utility.

Trade-off

The idea of sacrificing some marginal utility from one good to gain utility from another.

Utils

A notional unit of utility; numerical utils are subjective and not comparable across individuals.

Normal goods

Goods whose consumption rises as income rises.

Inferior goods

Goods whose consumption falls as income rises.

Substitution effect

When a good's price changes, consumers substitute toward relatively cheaper goods.

Income effect

The change in consumption resulting from a change in purchasing power due to price changes.

Demand curve

A graph showing the relationship between price and quantity demanded.

Budget constraint pivot

A price change that rotates or pivots the budget constraint, altering feasible bundles.

Consumer preferences

Tastes and priorities that influence which bundles a consumer chooses.

Policy influence on consumption

Government policies that alter incentives and thus consumption decisions.

Behavioral economics

The study of economic decisions using psychology to explain deviations from rationality.

Loss aversion

The tendency to feel losses more acutely than gains of the same size.

Mental accounting

Treating money differently depending on its source or intended use.

Nudges

Subtle interventions that steer people toward better decisions without restricting choices.

Automatic enrollment

A default enrollment in a program (e.g., retirement plans) unless opted out.

Fungible

Goods or money that are interchangeable and considered equivalent in value.