5.5: Key Terms
- Page ID
- 215614
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- Behavioral Economics
- A branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation.
- Budget Constraint (Budget Line)
- Shows the possible combinations of two goods that are affordable given a consumer’s limited income.
- Consumer Equilibrium
- The point on the budget line where the consumer gets the most satisfaction; this occurs when the ratio of the prices of goods is equal to the ratio of the marginal utilities.
- Diminishing Marginal Utility
- The common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit.
- Fungible
- The idea that units of a good, such as dollars, ounces of gold, or barrels of oil, are capable of mutual substitution with each other and carry equal value to the individual.
- Income Effect
- A higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect.
- Marginal Utility
- The additional utility provided by one additional unit of consumption.
- Marginal Utility per Dollar
- The additional satisfaction gained from purchasing a good given the price of the product (MU/Price).
- Substitution Effect
- When a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect.
- Total Utility
- Satisfaction derived from consumer choices.