Microeconomics Chapter 6
Home > Preview
The flashcards below were created by user
on FreezingBlue Flashcards.
What does utility mean?
•The satisfaction, or pleasure, that people receive from consuming a good or service
What is total utility?
•The amount of satisfaction received from all the units of a good or service consumed
Why does a consumer buy onebundle of goods, rather than another?
•Consumers make one choice over another depending on their marginal utility
What is marginal utility?
•The change in total utility from one additional unit of a good or service
What is the law of diminishing marginal utility?
•The principle that the extra satisfaction of a good or service declines as people consume more in a given period
When is total utility maximized?
•When the marginal utility per dollar of each good is equal and the entire budget is spent
What is consumer equilibrium?
•A condition in which total utility cannot increase by spending more of a given budget on one good and spending less on another good
Even though water provides agreater utility than diamonds, why are diamonds more expensive?
•Water is plentiful in most of the world, so its marginal utility is low
What are two alternativeexplanations of demand?
•Income effect •Substitution effect
What is theincome effect?
•The change in quantity demanded of a good or service caused by a change in real income (purchasing power)
What does the income effect show?
•As prices decline, your real income increases, increasing your buying power, so you buy more units, ceteris paribus
What is thesubstitution effect?
•The change in quantity demanded of a good or service caused by the change in its price relative to substitutes
What do the substitution andincome effects prove?
•The law of demand, that is, as the price of a good declines, consumers will buy more units of the good, and vice versa
What would you like to do?
Home > Flashcards > Print Preview