Consumer Choice and Utility

These flashcards cover key concepts related to consumer choice, utility, and the impacts of externalities and price changes on consumer behavior.

Externality

A consequence of an economic activity that affects other parties without being reflected in market prices.

Consumer Optimization

The point where consumer preferences meet budget constraints, maximizing satisfaction.

Budget Constraint

The limit on the consumption bundles that a consumer can afford.

Utility

The satisfaction or happiness derived from consuming goods and services.

Marginal Utility

The additional satisfaction gained from consuming one more unit of a good or service.

Diminishing Marginal Utility

The principle that the additional satisfaction decreases as more units of a good are consumed.

Substitution Effect

The change in consumption patterns due to a change in the relative prices of goods.

Income Effect

The change in consumption resulting from a change in real income or purchasing power.

Normal Goods

Goods whose demand increases as consumer income rises.

Inferior Goods

Goods whose demand decreases as consumer income rises.