And the total utility derived
from those choices
Budget constraint limits
what’s affordable. BEHAVIORAL ECONOMICS
Depends on preferences,
Shows that people’s state of mind
prices, and income.
can cause irrational decisions.
CONSUMER CHOICE
Consumers face scarcity Aim to maximize Combination of goods and Behave rationally
and must make choices. satisfaction (utility). services a consumer purchases. (in theory)
CHARACTERISTICS
A person who makes choices under conditions
of scarcity, seeking to maximize satisfaction UTILITY TOTAL UTILITY
BUDGET CONSTRAINT Satisfaction a person gets from Total satisfaction from
Limits combinations of (utility) given limited income.
consuming a good or service. consuming a good.
goods based on income.
MARGINAL UTILITY The change in total utility divided
CONSUMER EQUILIBRIUM Change in total utility from consuming
by the change in quantity
Comparing the trade-offs between one one more or one less of an item.
Maximizes total utility
affordable combination with all the
other affordable combinations.
BUDGET CONSTRAINT THE SINGLE-GOOD
AND CONSUMER CONSUMPTION AND LAW OF DIMINISHING MARGINAL UTILITY
The additional utility decreases
CONSUMER
with each unit added.
SUBSTITUTION EFFECT EQUILIBRIUM MARGINAL UTILITY
Spend each dollar on the item which yields the
Consumers switch to cheaper MAXIMIZING RULE greatest marginal utility per dollar of expenditure.
goods.
MARGINAL UTILITY PER DOLLAR Additional utility given the price of the product
INCOME EFFECT
A higher price lowers real purchasing
power, reducing demand for normal goods. TWO-GOOD
CONSUMPTION AND
INDIFFERENCE CURVES
People want to reach the highest
Consumers choose
indifference curve possible SHAPE INDIFFERENCE CURVE combinations of two goods.
All combinations of goods that
provide an equal level of utility
But are limited by their Convex with respect Downward sloping
budget constraints to the origin from left to right.
Represents the
choices of a single
level of utility
from those choices
Budget constraint limits
what’s affordable. BEHAVIORAL ECONOMICS
Depends on preferences,
Shows that people’s state of mind
prices, and income.
can cause irrational decisions.
CONSUMER CHOICE
Consumers face scarcity Aim to maximize Combination of goods and Behave rationally
and must make choices. satisfaction (utility). services a consumer purchases. (in theory)
CHARACTERISTICS
A person who makes choices under conditions
of scarcity, seeking to maximize satisfaction UTILITY TOTAL UTILITY
BUDGET CONSTRAINT Satisfaction a person gets from Total satisfaction from
Limits combinations of (utility) given limited income.
consuming a good or service. consuming a good.
goods based on income.
MARGINAL UTILITY The change in total utility divided
CONSUMER EQUILIBRIUM Change in total utility from consuming
by the change in quantity
Comparing the trade-offs between one one more or one less of an item.
Maximizes total utility
affordable combination with all the
other affordable combinations.
BUDGET CONSTRAINT THE SINGLE-GOOD
AND CONSUMER CONSUMPTION AND LAW OF DIMINISHING MARGINAL UTILITY
The additional utility decreases
CONSUMER
with each unit added.
SUBSTITUTION EFFECT EQUILIBRIUM MARGINAL UTILITY
Spend each dollar on the item which yields the
Consumers switch to cheaper MAXIMIZING RULE greatest marginal utility per dollar of expenditure.
goods.
MARGINAL UTILITY PER DOLLAR Additional utility given the price of the product
INCOME EFFECT
A higher price lowers real purchasing
power, reducing demand for normal goods. TWO-GOOD
CONSUMPTION AND
INDIFFERENCE CURVES
People want to reach the highest
Consumers choose
indifference curve possible SHAPE INDIFFERENCE CURVE combinations of two goods.
All combinations of goods that
provide an equal level of utility
But are limited by their Convex with respect Downward sloping
budget constraints to the origin from left to right.
Represents the
choices of a single
level of utility
