Chapter 6: Consumer Choice Theory

These flashcards cover key concepts related to Consumer Choice Theory, including utility, marginal utility, budget constraints, and consumer behavior.

Total Utility (TU)

The total satisfaction or happiness a consumer receives from consuming a good or service.

Marginal Utility (MU)

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

Diminishing Marginal Utility

The principle that as a consumer consumes more units of a good, the additional satisfaction obtained from each subsequent unit decreases.

Budget Constraint

An equation representing the limit on the consumption bundles that a consumer can afford, expressed as Px x + Py y ≤ M.

Consumer Equilibrium

The point at which the consumer maximizes utility by equalizing the ratio of marginal utility to price for all goods consumed.

Marginal Benefit (MB)

The additional benefit received from consuming one more unit of a good; should equal marginal cost for optimal consumption.

Partial Derivative (∂)

A derivative that shows how a function changes as only one variable changes while keeping others constant.

Utility Maximization Problem

The problem consumers face in choosing the combination of goods that maximizes their overall utility subject to a budget constraint.

Demand Function

A mathematical representation that describes the quantity of a good that consumers are willing and able to purchase at different prices.

Inverse Relationship

A situation where an increase in one variable leads to a decrease in another; relevant for price and quantity demanded.

Marginal Rate of Substitution (MRS)

The rate at which a consumer is willing to give up one good in exchange for another while maintaining the same level of utility.

Utility Function

A mathematical representation of a consumer's preference ordering over a set of goods.