Unit 5: Consumer Theory

consumer theory

the study of how buyers decide to allocate income toward consumption.

utility maximizer

someone who seeks to achieve the highest possible satisfaction or happiness.

utility

the happiness or benefit consumers derive from a good's consumption.

util

an imaginary unit of measurement representing the amount of utility a good provides.

total utility

the total amount of happiness a consumer derives from a good at any particular level of consumption.

marginal utility

the change in total utility that a consumer experiences when one more unit of a good is consumed.

law of diminishing marginal utility

the observation that as more units of a good are consumed the amount of happiness derived from each additional unit decreases as consumption increases.

marginal utility per dollar spent (MU/$)

the "bang per buck" that a consumer gets from consuming a particular quantity of a good at a given price.