Principles of Microeconomics Chapter 6: Household Behavior and Consumer Choice

These flashcards cover essential vocabulary and concepts from Chapter 6 of the Principles of Microeconomics, focusing on household behavior and consumer choice.

budget constraint

The limits imposed on household choices by income, wealth, and product prices.

choice set

The set of options that is defined and limited by a budget constraint.

perfect knowledge

The assumption that households have knowledge of all qualities and prices in the market.

perfect competition

An industry structure with many small firms producing identical products, with no firm able to control prices.

homogeneous products

Products that are identical to or indistinguishable from one another.

utility

The satisfaction a product yields.

marginal utility

The additional satisfaction gained by the consumption of one more unit of a good or service.

total utility

The total satisfaction a product yields.

law of diminishing marginal utility

The principle that as more of a good is consumed, the additional satisfaction from each additional unit decreases.

real income

The set of opportunities to purchase real goods and services available to a household as determined by prices and money income.

utility-maximizing rule

Equating the ratio of the marginal utility of a good to its price for all goods.

substitution effect

The change in consumption patterns due to a change in the relative price of goods.

income effect

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

labor supply curve

A curve that shows the quantity of labor supplied at different wage rates.

diminishing returns

The principle that adding more of a variable input to a fixed input will eventually yield lower per-unit returns.

financial capital market

The complex set of institutions in which suppliers of capital (households that save) and the demand for capital interact.

indifference curve

A set of points representing different combinations of goods that yield the same total utility.

marginal rate of substitution

The rate at which a consumer is willing to give up good Y for good X while maintaining the same level of utility.

opportunity cost

The value of the next best alternative that is forgone when making a choice.

preferences

The individual tastes and preferences that influence consumer choice.

household demand

The total quantity of a good or service that households are willing to purchase at various prices.

constrained choice

The concept that consumers make decisions within the limits of their resources.

price elasticity of demand

The responsiveness of quantity demanded to a change in price.

substitution in consumption

The process by which consumers replace higher priced goods with lower priced alternatives.

perfectly competitive market

A market structure characterized by a large number of buyers and sellers, none of which can influence the market price.