ECON 2010: Chapter 10 - Consumer Choice and Behavioral Economics

Utility

The enjoyment or satisfaction people receive from consuming goods and services.

Marginal utility (MU)

The change in total utility a person receives from consuming one additional unit of a good or service.

Marginal

Additional

Law of diminishing marginal

The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time.

Budget constraint

The limited amount of income available to consumers to spend on goods and services.

Income effect

The change in the quantity demanded of a good that results from the effect of a change in price on consumer purchasing power, holding all other factors constant.

Substitution effect

The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods, holding constant the effect of the price change on consumer purchasing power.

Network externality

A situation in which the usefulness of a product increases with the number of consumers who use it.

Behavioral economics

The study of situations in which people make choices that do not appear to be economically rational.

Opportunity cost

The highest-valued alternative that must be given up to engage in an activity.

Endowment effect

The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good if they didn't already own it.

Sunk cost

A cost that has already been paid and cannot be revocered.

Indifference curve

A curve that shows the combinations of consumption bundles that give the consumer the same utility.

Marginal rate of substitution (MRS)

The rate at which a consumer would be willing to trade off one good for another.