ap economics: module 51 terms

demand curve

represents the tastes, preferences, and resulting choices of individual consumers

• its shape reflects the utility people get from consuming more of a g/s

utility

a measure of personal satisfaction

• individuals try to maxmize utility gained from consumption (just like how producers try to maximize outputs from inputs)

utils

a unit of utility

utility function

shows the relationship between a consumer’s utility and the consumption bundle they consume

consumption bundle

combination of g/s

to maximize total utility, consumers must focus on ____

marginal utility

marginal utility

of a g/s, the change in total utility generated by consuming one additional unit of that g/s

• Δ total utility/Δ quantity

marginal utility curve

shows how marginal utility depends on the quantity of a g/s consumed

• points plotted at midpoints between numbered quantities

• slopes downward → law of diminishing marginal utility

principle of diminishing marginal utility

each successive unit of a g/s consumed adds less to total utility than does the previous unit

• additional satisfaction decreases as consumption increases

• the more of a g/s you consume, the closer you are to being satiated

• not universal, some rare exceptions

budget constraint

limits the cost of a consumer’s consumption bundle to no more than the consumer’s income

• cost of consumption bundle ≤ total income

consumption possibilities

the set of all consumption bundles that are affordable, given a consumer’s income and prevailing prices

budget line (BL)

shows the consumption bundles available to a consumer who spends all of their income

• on or under BL → afforable

• above BL → unaffordable

• on the BL, all income is spent

• downward sloping; opportunity cost of buying more of one good is buying less of another

optimal consumption bundle

the consumption bundle that maximizes a consumer’s total utility, given their budget constraint

• makes the best trade-off between 2 goods

marginal utility per dollar

spent on a g.s, the additional utility from spending one more dollar on that g/s

• decreases as consumption increases (diminishing MU)

• MU per $ spent on a good = MU of 1 unit of the good/price of 1 unit of the good

  • MU_good/P_good

optimal consumption rule

in order to maximize utility, a consumer must equate the MU per $ spent on each g.s in the consumption bundle

• @ optimal consumption bundle → MU_A/P_A = MU_B/P_B = so on for as many goods there are in the consumption bundle

• reshuffling between 2 goods will keep happening until MU per $ is equal for both