Chapter 7 Utility Maximization
Terms in this set (19)
Law of diminishing marginal utility
As consumption of a good or service increases, the marginal utility obtained from each additional unit of a good or service decreases
Explains downward sloping demand curve
(Utility is want-satisfying power.)
the satisfaction one gets from consuming a good or service
Not the same as usefulness
Difficult to quantify
the total amount of satisfaction
the extra satisfaction from an additional unit of the good.
marginal utility is the change in total utility that results from the consumption of 1 more unit of an item.
units of utility
These imaginary units of satisfaction are convenient for quantifying consumer behavior for explanatory purposes.
Total Utility Graph
The total utility (amount of satisfaction) goes up as the amount of the item consumed increases. But the total utility reaches a plateau and begins to decline as more of the item is consumed.
The marginal utility (extra satisfaction realized) goes down as more of the item is consumed.
The amt of marginal utility (extra satisfaction) stays positive but begins to diminish as more of an item is consumed.
The marginal utility (extra satisfaction) is zero because there's no more pleasure from consuming more of the item.
Consumers want to get "the most for their money" or, technically, to maximize their total utility.
consumer has a limited number of dollars, he or she cannot buy everything wanted.
To maximize satisfaction, the consumer should allocate his or her money income so that the last dollar spent on each product yields the same amount of extra (marginal) utility.
When the consumer has "balanced his margins" or balances his satification
The theory of consumer behavior assumes that:
consumers behave rationally, attempting to maximize their satisfaction.
diminishing marginal utility
that added satisfaction declines as a consumer acquires additional units of a given product.
marginal utility-to-price ratios
Utils or Amount of Bang for your Buck
the impact that a change in the price of a product has on a consumer's real income and consequently on the quantity demanded of that good.
the impact that a change in a product's price has on its relative expensiveness and consequently on the quantity demanded.
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