Consumer Theory

Utility

A measure of satisfaction or happiness from consuming a good or service

Utility Function

A formula that calculates total utility from a bundle of goods

Bundle

A specific combination of goods and services a consumer could choose

Marginal Utility (MU)

The change in total utility from consuming one more unit

Diminishing Marginal Utility

Each additional unit consumed adds less utility than the previous one

Revealed Preference

Preferences inferred from observing actual choices and behavior

Budget Constraint

All combinations of goods a consumer can afford given income and prices

Income Effect

Change in consumption due to a change in purchasing power caused by a price change

Substitution Effect

Change in consumption caused by a change in the relative price of goods

Altruism

Gaining utility simply because another person's utility increases

Reciprocity

Responding to another's action with a similar action (rewarding good, punishing bad)