Consumer Theory and Utility Maximization

Flashcards covering key concepts related to consumer theory, including definitions and key economic principles.

Utility

The amount of satisfaction obtained from consuming a good or service.

Marginal Utility

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

Law of Diminishing Marginal Utility

As consumption of a good increases, the additional satisfaction gained from consuming each additional unit decreases.

Utility Maximizing Rule

Consumers will allocate their spending until the marginal utility per dollar spent is equal for all goods.

Indifference Curve

A graph that represents combinations of different goods that provide the same level of utility to a consumer.

Marginal Rate of Substitution (MRS)

The rate at which a consumer can give up some amount of one good in exchange for another good while maintaining the same level of utility.

Budget Constraint

The limit on the consumption choices of individuals based on their income and the prices of goods.

Substitution Effect

The change in consumption that occurs when consumers switch from one good to another as prices change.

Income Effect

The change in consumption resulting from a change in real income due to the change in prices of goods.