Microeconomics Chapter 6 - Consumer Choices Flashcards

Vocabulary-style flashcards covering consumption choices, utility theory, income and price effects, and behavioral economics based on Chapter 6 study notes.

Budget Constraint (Budget Line)

Shows every combination of two goods a consumer can afford given their income and the goods' prices.

Utils

A hypothetical unit used to measure the satisfaction a person gets from their choices; they are subjective and cannot be compared between people.

Marginal Utility (MU)

The extra satisfaction obtained from consuming one more unit of a good, calculated as the change in total utility divided by the change in quantity.

Law of Diminishing Marginal Utility

The principle that as a person consumes more of a good, the extra utility from each additional unit normally decreases.

Utility-Maximizing Choice

The specific combination of goods that provides the highest total utility within a consumer's budget constraint.

Marginal Utility per Dollar

The amount of additional utility a consumer receives for every dollar spent on a good, calculated as $\frac{MU}{\text{Price}}$.

Consumer Equilibrium

The utility-maximizing point where the marginal utility per dollar is equal across all goods purchased, expressed as $\frac{MU_1}{P_1} = \frac{MU_2}{P_2}$.

Normal Good

A good for which the quantity consumed rises when income rises and falls when income falls.

Inferior Good

A good for which the quantity consumed falls when income rises because the consumer can afford preferred, pricier alternatives.

Substitution Effect

The tendency of consumers to move away from a good whose price has risen toward a relatively cheaper alternative.

Income Effect

How a change in price affects the real buying power of a consumer's income, leading to changes in the quantity demanded of a good.

Demand Curve

A summary of how the utility-maximizing quantity of a good changes as its price changes, holding everything else constant (ceteris paribus).

Rationality

The assumption in traditional economic models that people use all available information to make consistent decisions in their own best interest.

Behavioral Economics

A framework that incorporates psychology into economic models, considering how emotions, framing, and mental shortcuts shape decisions.

Loss Aversion

The behavioral finding that a $1 loss feels roughly $2.25 \times$ as painful as a $1 gain feels good.

Nudges

A behavioral economics strategy of redesigning the default choice to influence behavior without mandatory rules, such as automatic enrollment in retirement plans.

Mental Accounting

The psychological tendency for people to sort money into separate mental "accounts" with different rules, rather than treating all money as fungible.

Fungible

The traditional economic assumption that money is interchangeable and that a dollar has the same value regardless of its source or label.

Opportunity Cost of Time

The value of the income or alternative activities given up when choosing to spend time on a specific pursuit, such as education during an economic downturn.