Lecture 8: Marginal Analysis, Utility, and Optimal Consumption

This set of flashcards covers key concepts from Chapter 1 Introduction, Chapter 2 The Marginal Benefit, Chapter 3 Marginal Utility Function, Chapter 4 The Marginal Utility, Chapter 5 Use Marginal Utility, Chapter 6 The Marginal Utility, and Chapter 7 Conclusion, focusing on vocabulary related to utility, taxes, and marginal analysis in economics.

Net Benefit Maximization

Determined by setting the marginal benefit equal to the marginal cost for a particular action.

Utility

In economics, a measure of how happy or how much enjoyment a consumer gets from consuming different quantities of a good.

More of X is Good

A fundamental assumption in economics for goods, meaning consuming more of a good (or less of a 'bad' like pollution) increases happiness or utility.

Marginal Utility

The change in utility as the consumption of a good (x) increases a little bit; it is a particular application of marginal benefit.

Diminishing Marginal Utility

The concept that each additional unit of a good provides less happiness or utility than the previous unit, considered a pervasive phenomenon.

Marginal Benefit vs. Marginal Utility

Marginal utility is a specific case of marginal benefit for an individual's happiness, while marginal benefit can also refer to profit for a firm or tax revenue for the government.

Indifferent

An economic term used when a consumer likes two different bundles of goods equally, meaning they get the same utility from either.

Marginal Utility of Good One

The extra utility from an increase in the consumption of one good, while holding the consumption of other goods fixed.

Optimal Consumption Rule

Consumers choose allocations of goods such that the ratio of marginal utilities (MU1/MU2) is equal to the ratio of prices (P1/P2) for those goods.

Bang per Buck

An intuitive way to understand the optimal consumption rule, where the marginal utility gained per dollar spent on one good should equal that of another good.

Marginal Rate of Substitution (MRS)

The ratio of marginal utilities, indicating how much of one good can be switched for another while keeping total utility constant; it must be set equal to the price ratio at the optimum.