Introductory Microeconomics – Consumer Theory Vocabulary

Key vocabulary terms covering utility concepts, laws, budget constraints, indifference analysis, and consumer equilibrium as presented in the lecture notes.

Consumer

An economic agent (individual, household or institution) that uses goods and services for direct satisfaction of wants.

Utility

The satisfaction or want-satisfying power obtained from consuming a good or service.

Cardinal Measurement of Utility

Approach (Marshall) that assumes utility can be measured in absolute units called ‘utils’ (1, 2, 3 …).

Ordinal Measurement of Utility

Approach (Hicks) that assumes utility can only be ranked (higher or lower) and not expressed in numerical units.

Total Utility (TU)

The sum of utility derived from consuming all units of a commodity.

Marginal Utility (MU)

The additional utility gained from consuming one extra unit of a commodity; MU = ΔTU.

Law of Diminishing Marginal Utility

Principle that MU declines as successive units of a standard good are consumed continuously.

Point of Saturation (Satiety)

Quantity at which MU becomes zero and TU is maximised.

Negative Marginal Utility

Situation where an additional unit reduces total satisfaction, making MU less than zero.

Marginal Utility of Money (MUM)

Utility derived from the basket of goods that one monetary unit can purchase; assumed constant in utility analysis.

Consumer's Equilibrium

Position where a consumer maximises satisfaction given income and prices, with no incentive to alter expenditure.

Law of Equi-Marginal Utility

For multiple goods, equilibrium requires MU per rupee spent to be equal across all goods and equal to MUM.

Budget Set

All attainable combinations of two goods given the consumer’s income and the goods’ prices.

Budget Line

The boundary of the budget set showing combinations that exhaust the entire income (P₁X₁ + P₂X₂ = Y).

Price Line

Another name for the budget line, emphasizing its slope equals the price ratio P₁/P₂.

Feasible Region

Area on or below the budget line containing all affordable consumption bundles.

Non-Feasible Region

Area above and to the right of the budget line containing unattainable bundles given current income and prices.

Shift of Budget Line

Parallel movement of the budget line due to a change in income or proportional change in both prices.

Rotation of Budget Line

Pivot of the budget line caused by a change in the price of one good while income and the other price remain constant.

Slope of Budget Line

The negative price ratio (–P₁/P₂); shows the amount of Good-Y foregone for an extra unit of Good-X.

Indifference Set

Group of consumption bundles that provide the same level of satisfaction to the consumer.

Indifference Curve (IC)

Graphical representation of an indifference set; each point shows a bundle giving identical utility.

Indifference Map

A family of indifference curves ranking higher and lower utility levels for a consumer.

Monotonic Preference

Assumption that consuming more of at least one good (with none less of the other) yields higher satisfaction.

Marginal Rate of Substitution (MRS)

Rate at which a consumer is willing to give up Good-Y for an extra unit of Good-X while maintaining the same utility; equals –ΔY/ΔX.

Convexity of IC

Property that ICs bow toward the origin because MRS declines as the consumer substitutes one good for another.

Tangent Condition

Equilibrium requirement that the IC be tangent to the budget line: MRS = P₁/P₂.

One-Commodity Equilibrium

With a single good, equilibrium occurs when MU (in money terms) equals its price.

Two-Commodity Equilibrium

With two goods, equilibrium requires MU₁/P₁ = MU₂/P₂ = MUM.

Fundamental Psychological Law

Nickname for the law of diminishing marginal utility due to its universal nature in human satisfaction.

Rational Consumer

A consumer who aims to maximise satisfaction from given income and prices.

Independent Utility

Assumption that utility from one good depends only on the quantity of that good, not on others.

Utility Analysis

Marshallian approach to consumer behaviour based on cardinal measurement of utility.

Indifference Curve Analysis

Hicksian approach to consumer behaviour based on ordinal utility and IC-budget framework.

Real Income

Purchasing power of money income measured by the quantity of goods it can buy; rises when prices fall.

Marginal Utility Schedule

Table listing MU obtained from each successive unit of a good.