AP Microeconomics: Chapter 6

Law of Diminishing Marginal Utility

Gain in satisfaction becomes smaller as successive units of a specific product are consumed.

Utility

Ability or capacity of a good or service to be useful and give satisfaction to someone.

Total Utility

The total amount of satisfaction obtained from consumption of a good or service.

Marginal Utility

The amount that utility increases with an increase of one unit of an economic good or service.

Rational Behavior

Human behavior based on comparison of marginal costs and marginal benefits; behavior designed to maximize total utility.

Budget Constraint

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

Utility-maximizing Rule

The principle that to obtain the greatest utility, the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.

Consumer Equilibrium

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

Income Effect

Indicates that a lower price increases the purchasing power of a buyer's money income.

Substitution Effect

Economic rule stating that if two items satisfy the same need and the price of one rises, people will buy the other.

Behavioral Economics

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

Status Quo

Existing state or condition.

Loss Averse

In prospect theory, the property of people's preferences that the pain generated by losses feels substantially more intense than the pleasure generated by gains.

Prospect Theory

A major theory in decision making. 2 main components: 1) A person's wealth affects his or her choices 2) Because losses feel much worse than gains feel good, a person will try to avoid situations that involve losses.

Framing Effect

The decision-making bias that results from the way a decision, question, or problem is worded.

Anchoring

A cognitive term (a heuristic) that refers to the tendency of people to make decisions based on reference points, or standards used to make judgements.

Mental Accounting

The tendency to treat money differently depending on how it was acquired and to what mental category it is attached.

Endowment Effect

Placing a higher value on objects you already own than objects that you do not.