micro chapter 7 terms

the law of diminishing marginal utility

the MU of a product falls as a consumer uses additional units of a product

utility

the satisfaction a person gets from consuming a product

total utility

the total amount of satisfaction a person obtains from consuming a product

marginal utility

the extra satisfaction a person obtains from consuming an extra/additional unit of a product

total utility increases at…

…a decreasing rate

what happens to MU when TU is at its max?

MU is zero

as MU decreases…

…TU increases

what happens when TU declines?

MU is negative

theory of consumer behavior

consumers are rational, have preferences, have a budget constraint, and must pay a price for the goods they acquire

when is TU at max? (utility-maximizing rule)

when MU of the last dollar spent on each product is the same for all products

when has the consumer reached consumer equilibrium?

when they follow the utility-maximizing rule

the allocation rule

consumers will max satisfaction when they allocate their money so that the last dollar spent on each product yields the same MU

the allocation rule equation

MUa/Pa = MUb/Pb

income effect

the change in the demand for a good or service caused by a change in a consumer's purchasing power. purchasing power affects consumer choice.

substitution effect

the change in a consumer's consumption of a good due to a change in its price, while keeping the consumer's utility/real income constant to keep equilibrium.

ipods to cd players

ipods more popular than cd players because consumers decide the ratio of MU to price is higher for ipods

diamond-water paradox

highlights difference between total utility and marginal utility: water is cheap = low MU and diamonds are expensive = high MU, but water has the higher total utility because it’s essential to life

time in terms of the MU theory

the total price of a good/service is the market price plus the value of the time taken to consume (opportunity cost)

why have expenditures on medical care increased?

because insurance pays for a portion, incentivizing the consumer to consume more because the price is lowered

cash gifts vs material/non-cash gifts

cash gifts are more efficient because they are more likely to match consumer preference, increasing TU

diminishing MU M&M example

diminishing MU sets in slower when there’s more variety

time inconsistency in decision making example

people prioritize saving for retirement higher when they are closer to retirement compared to when they are early in their career

time inconsistency exam example

people attach less value to postponing an exam early in the semester compared to at the end of the semester

time inconsistency

people prioritize short-term gains over long-term benefits, leading to delays in important decisions