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What does utility mean?
•The satisfaction, or pleasure, that people receive from consuming a good or service
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What is total utility?
•The amount of satisfaction received from all the units of a good or service consumed
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Why does a consumer buy onebundle of goods, rather than another?
•Consumers make one choice over another depending on their marginal utility
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What is marginal utility?
•The change in total utility from one additional unit of a good or service
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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
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When is total utility maximized?
•When the marginal utility per dollar of each good is equal and the entire budget is spent
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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
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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
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What are two alternativeexplanations of demand?
•Income effect •Substitution effect
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What is theincome effect?
•The change in quantity demanded of a good or service caused by a change in real income (purchasing power)
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What does the income effect show?
•As prices decline, your real income increases, increasing your buying power, so you buy more units, ceteris paribus
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What is thesubstitution effect?
•The change in quantity demanded of a good or service caused by the change in its price relative to substitutes
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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
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