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6.5: Key Terms

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    108605

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    Cardinal utility is a measurable concept of satisfaction.

    Total utility is a measure of the total satisfaction derived from consuming a given amount of goods and services.

    Marginal utility is the addition to total utility created when one more unit of a good or service is consumed.

    Diminishing marginal utility implies that the addition to total utility from each extra unit of a good or service consumed is declining.

    Consumer equilibrium occurs when marginal utility per dollar spent on the last unit of each good is equal.

    Law of demand states that, other things being equal, more of a good is demanded the lower is its price.

    Ordinal utility assumes that individuals can rank commodity bundles in accordance with the level of satisfaction associated with each bundle.

    Budget constraint defines all bundles of goods that the consumer can afford with a given budget.

    Affordable set of goods and services for the consumer is bounded by the budget line from above; the non-affordable set lies strictly above the budget line.

    Indifference curve defines combinations of goods and services that yield the same level of satisfaction to the consumer.

    Indifference map is a set of indifference curves, where curves further from the origin denote a higher level of satisfaction.

    Marginal rate of substitution is the slope of the indifference curve. It defines the amount of one good the consumer is willing to sacrifice in order to obtain a given increment of the other, while maintaining utility unchanged.

    Diminishing marginal rate of substitution reflects a higher marginal value being associated with smaller quantities of any good consumed.

    Consumer optimum occurs where the chosen consumption bundle is a point such that the price ratio equals the marginal rate of substitution.

    This page titled 6.5: Key Terms is shared under a CC BY-NC-SA 4.0 license and was authored, remixed, and/or curated by Douglas Curtis and Ian Irvine (Lyryx) via source content that was edited to the style and standards of the LibreTexts platform; a detailed edit history is available upon request.