Economics Chapter 6

budget constraint (or budget line)

shows the possible combinations of two goods that are affordable given a consumer’s limited income

diminishing marginal utility

the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit

income effect

a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect

marginal utility

the additional utility provided by one additional unit of consumption