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Microeconomics Chp 7

TermDefinition
Law of diminishing marginal utility (satisfaction) As consumption of a good or service increases, the additional (marginal) satisfaction gained from consuming each additional unit decreases Ex: The satisfaction of eating any Oreo after the first decreases with each Oreo
Utility the satisfaction one gets from consuming a good or service. -Not the same as usefulness -Subjective -Difficult to quantify
Total utility the total amount of satisfaction.
Marginal utility the extra satisfaction from an additional unit of the good MU= △TU/△Q Ex: Consider a family that has seven slices of bread; the marginal utility of receiving an eighth slice is significant, as it reduces their hunger further.
Theory of Consumer Behavior (2) Rational behavior -Preferences Budget constraint -Prices
Utility Maximizing Rule To maximize satisfaction, consumers should allocate income so that the last dollar spent on each product yields the same marginal utility
Consumer Equilibrium when the price of a good equals the marginal utility (MU) derived from it, leading to a balance where total satisfaction is at its highest
Basic determinants of an individual’s demand: -Preferences or tastes -Income -Prices of other goods
Income effect: the change in demand for a good or service resulting from a change in a consumers' real income Ex: your income increased, allowing you to buy more of your favorite candy now that you have more purchasing power
Substitution effect: occurs when consumers switch from one product to another due to changes in relative prices, leading to shifts in demand.
Excise taxes: Taxes that target particular products -can change consumer behavior or upset consumer equilibrium Ex: A 3 pack-per-day smoker might cut down to one pack after excise taxes
Created by: Phillies55
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