Chapter 7: Consumer Behavior

Law of diminishing marginal utility

Added satisfaction declines as a consumer acquires additional units of a given product

Utility

Want-satisfying power

Total utility

Total amount of satisfaction/pleasure a person derives from consuming some specific quantity

Consumer

will only buy additional units of a product if its price falls.

Marginal utility

Extra satisfaction gained from an additional unit

Rational behavior

Consumers are rational people who use income to derive the greatest amount of utility

Budget constraint

Consumers have a fixed, limited amount of money income

Utility-maximizing rule

To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility

Consumer equilibrium

When the consumer has balanced their margins and has no incentive to alter their spending pattern

Income effect

Impact that a change in the price of a product has on a consumer’s real income and the quantity demanded

Substitution effect

Impact that a change in a product’s price has on its relative expensiveness and the quantity demanded