Theory of Consumer Behaviour – Key Vocabulary

Vocabulary flashcards covering essential terms and assumptions from the lecture on consumer behaviour, utility theory, and decision making.

Theory of Consumer Behaviour

Study of how consumers allocate limited income among goods and services to maximise satisfaction.

Law of Demand

Principle stating that quantity demanded of a good varies inversely with its price, ceteris paribus.

Utility

The want-satisfying power of a commodity or service; the satisfaction a consumer derives.

Cardinal Approach

Utility theory that assumes utility can be measured numerically and manipulated arithmetically.

Cardinal Utility

Quantitative measure of satisfaction, often expressed in money terms, used in the cardinal approach.

Law of Diminishing Marginal Utility

Rule that additional units of a good provide declining extra satisfaction beyond a saturation point.

Ordinal Approach

Utility theory that ranks bundles by preference order without assigning numerical values.

Ordinal Utility

Satisfaction expressed only in order of preference (first, second, etc.), not measurable in units.

Indifference Curve

Graph showing all combinations of two goods that give the consumer the same level of satisfaction.

Transitivity (of Choice)

Axiom that if a consumer prefers A to B and B to C, then A must be preferred to C.

Consistency of Choice

Assumption that preferences remain stable; a consumer will not reverse earlier rankings of goods.

Non-satiation

Assumption that more of any good is preferred to less because the consumer has not reached saturation.

Marginal Rate of Substitution (MRS)

Rate at which a consumer is willing to substitute one good for another while maintaining equal utility (ΔB/ΔA).

Diminishing Marginal Rate of Substitution

Concept that the MRS declines as the consumer substitutes one good for another along an indifference curve.

Rational Consumer

Individual assumed to make choices that maximise utility subject to income and prices.

Budget Constraint

Limit imposed by income and prices on the combinations of goods a consumer can afford.

Consumer Decision-Making Roles

The individual as consumer, provider of productive resources (labour/capital), and political participant (voter/taxpayer).

Preferences

Ordered rankings of alternatives indicating which bundles of goods the consumer finds more desirable.

Completeness (of Preferences)

Axiom that for any two alternatives, a consumer can state whether A is preferred to B, B to A, or they are equally attractive.

Utility (Bentham)

Jeremy Bentham’s term for the relative desirability or welfare derived from different alternatives.