Econ Chapter 6 Consumer Choices

utility

the enjoyment or satisfaction that people obtain from consuming goods and services

marginal utility

the amount by which total utility would change when consuming an extra unit of a good or service

law of diminishing marginal utility

the principle that consumers experience diminishing additional satisfaction as they consume more of a good/service during a given period of time

rule of equal marginal utility per dollar spent

consumers should seek to equalize the “bang for the buck”

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

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

when price decreases…

consumer purchasing power increases, income effect causes quantity demanded to increase for normal goods and decrease for inferior goods, substitution effect causes opportunity cost of consuming a good to decrease with price

when price increases…

consumer purchasing power decreases; income effect causes quantity demanded to decrease for normal goods and increase for inferior goods, substitution effect causes opportunity cost of consuming a good to increase with price

for a demand curve to be upward sloping…

the good would have to be an inferior good making up a very large portion of consumers’ budgets w/ a greater income effect than substitution effect

network externalities

situations in which the usefulness of a product increases w/ the number of consumers who use it

endowment effect

people are more likely to retain an object they own than acquire that same object when they do not own it

sunk cost

a cost that has already been paid and can’t be recovered