Chapter 21 Key Terms McConnell and Brue 14th Edition
income effect
A change in the price of a product changes a consumer’s real income (purchasing power) and thus the quantity of the product purchased.
substitution effect
(1) A change in the price of a consumer good changes the relative expensiveness of that good and hence changes the consumer’s willingness to buy it rather than other goods. (2) The effect of a change in the price of a resource on the quantity of the resource employed by a firm assuming no change in its output.
utility
The want-satisfying power of a good or service; the satisfaction or pleasure a consumer obtains from the consumption of a good or service (or from the consumption of a collection of goods and services).
total utility
The total amount of satisfaction derived from the consumption of a single product or a combination of products.
marginal utility
The extra utility a consumer obtains from the consumption of one additional unit of a good or service; equal to the change in total utility divided by the change in the quantity consumed.
law of diminishing marginal utility
As a consumer increases the consumption of a good or service the marginal utility obtained from each additional unit of the good or service decreases.
utility-maximizing rule
To obtain the greatest utility the consumer should allocate money income so that the last dollar spent on each good or service yields the same marginal utility.