Consumer Theory Basics

Key vocabulary covering utility concepts, the Law of Diminishing Marginal Utility, consumer equilibrium, and budget constraints.

Utility

The satisfaction or pleasure a consumer derives from consuming goods and services.

Total Utility (TU)

The overall amount of satisfaction obtained from consuming a given quantity of a good or service.

Marginal Utility (MU)

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

Law of Diminishing Marginal Utility

As successive units of a good are consumed, the marginal utility obtained from each additional unit eventually declines.

Assumptions of the Law of Diminishing Marginal Utility

Homogeneous units, continuous consumption, rational consumer, and constant taste & preferences during consumption period.

Exceptions to the Law of Diminishing Marginal Utility

Items such as collectibles, addictive goods, or goods consumed after long intervals may not show declining marginal utility initially.

Consumer Equilibrium

The point at which a consumer allocates income so that the last unit of money spent on each good provides the same marginal utility, maximizing total utility.

Budget Line (Budget Constraint)

A graphical representation of all possible combinations of two goods a consumer can purchase given income and prices.

Budget Shift (Change in Income)

When income changes while prices remain constant, the budget line shifts parallel outward (income rise) or inward (income fall).

Budget Pivot (Change in Price)

When the price of one good changes, the budget line pivots around the intercept of the other good, reflecting new attainable bundles.