5. Micro -- Model of Consumer Choice (Utility Maximization) -- Dunbar

Utility

The term economists use to talk about happiness or well-being.

Total Utility

The total amount of happiness experienced by the individual from consuming a particular good or service.

Marginal Utility

The change in total utility when a consumer changes his/her consumption by one unit. Mathematically, this can be calculated as the change in total utility divided by the change in the quantity consumed of the good/service.

Util

The term economists use for one unit of happiness/satisfaction. The more of these units one has the more happiness/satisfaction they have.

The Law of (Eventually) Diminishing Marginal Utility

This economic "law" states that as we consume more and more units of the same good, the additional/marginal happiness begins to fall, at least after a point. (i.e the "Hootie & the Blowfish Effect" from earlier in the class).

The Utility-Maximizing Rule

Economic "Rule" stating that in order to Maximize happiness (total utility), a consumer should buy the items that give him/her the highest MU/P, until his/her spendable income is exhausted. NOTE - When the consumer follows this purchasing strategy, he/she will find that after all his/her income has been spent, the MU/P for all the products will be equal!

"The Diamond-Water Paradox"

Famous "puzzle/paradox" about why items with great usefulness to us (e.g. water, air, etc.) often command lower prices than items with relatively little practical usefulness (e.g. rare baseball cards, precious gems, etc.).

Behavioral Economics

A sub-field of economics that weds the ideas of standard economic models with psychology concepts to study human behavior to figure out the limits of our rationality and to see if people are "predictably irrational."