This topic revolves around the fundamental concept of utility or satisfaction to explain consumption and demand behavior in the short term. Graphs and tables lend support as tools of understanding and analysis. In addition, the topic illustrates the simple dynamics of these tools which can serve as a starting point in understanding long-term consumption behavior.

TERMS TO REMEMBER:

BUDGET LINE – contains infinite points of combination of commodity items that the same budget can buy at a given price.

CONVERGENCE – often referred to as “catch-up effect” in economics.

INCOME EFFECT – potential increase in the consumption of two commodities.

INDIFFERENCE CURVE – a useful tool for analyzing consumption behavior on utility theory.

ISOCOST LINE – shows all combinations of inputs, which cost the same total amount.

MARGINAL RATE OF SUBSTITUTION – rate at which a consumer is ready to give up one good in exchange for another good while maintaining the same level of utility.

MARGINAL UTILITY – additional satisfaction derived from consumption of additional goods and services; also defined as the utility or dissatisfaction from the last unit of consumption.

MASLOW’S THEORY OF MOTIVATION – diagram that explains why people are driven by particular needs at particular times.

OPTIMUM COMBINATION – implies that a consumer can increase the level of satisfaction, despite a fixed income, by altering the consumption mix.

PARADOX VALUE – discusses why absolute necessities in life (i.e. water) are cheaper as compared to luxuries (i.e. diamonds).

REFERENCE GROUPS – groups that have a direct or indirect influence on persons attitudes or behavior.

SUBSTITUTION EFFECT – an idea that when price increases or income decreases, consumers will replace expensive items with cheaper alternatives.

TOTAL UTILITY (TU) – total amount of satisfaction derived from consuming foods and services.

UTILITY – satisfaction derived from the consumption of a commodity.