Econ Unit 6: Perfect Competition

Total Utility

happiness or satisfaction a person gets from using or consuming something — either one specific product or everything they consume.

Marginal Utility

The change in total utility derived from a one-unit change in consumption of a good.

Law of Diminishing Marginal Utility

The more person consumes a good per period, smaller increase in total utility from consuming one more unit

Consumer Equilibrium

The condition in which an individual consumer's budget is spent and the last dollar spent on each good yields the same marginal utility; therefore, utility is maximized.

Marginal valuation

The dollar value of the marginal utility derived from consuming each additional unit of a good.

Consumer surplus

difference between the max amount a consumer is willing to pay for a given quantity and what the consumer actually pays

Indifference Curve

Shows all combinations of goods that provide the consumer with the same satisfaction, or the same utility

Marginal Rate of Substitution

The number of "A" you are willing to give up to get more of "B", neither gaining or losing utility in the process

The Law of Diminishing Rate of Substitution

Says that as consumption of "A" increases, amount of "B" you are willing to give up to get "A" declines.

Indifference Map

A graphical representation of a consumer's tastes. Each curve reflects a different level of utility.

Properties of Indifference Curves 1

A particular indifference curve reflects a constant level of utility, so the consumer is indifferent about all consumption

- combinations along a given curve.

- Combinations are equally attractive.

Properties of Indifference Curves 2

If total utility is to remain constant, an increase in the consumption of one good must be offset by a decrease in the consumption of the other good, so each indifference curve slopes downward.

Properties of Indifference Curves 3

Because of the law of diminishing marginal rate of substitution, indifference curves bow toward the origin.

Properties of Indifference Curves 4

Higher indifference curves represent higher levels of utility.

Properties of Indifference Curves 5

Indifference curves do not intersect.

Budget Line

Depicts all possible combinations of videos and pizzas, given their prices and your budget.