Key Terms
Utility
The satisfaction or happiness derived from consuming a good or service. Measured in utils; subjective and non-comparable
Total Utility
The total satisfaction from consuming a given quantity of a good.
Marginal Utility
The change in total utility from consuming one more unit.
Budget constraint (budget line)
All combinations of two goods a consumer can afford when all income is spent at given prices.
Example
Automatically enrolling new employees in retirement savings plans with an opt-out option rather than an opt-in. Enrollme
Consumer equilibrium
The utility-maximizing combination of goods a consumer selects given preferences, prices, and budget.
To find the utility-maximizing point
Calculate total utility at each affordable combination, then pick the highest.
Example (from source)
Budget $56, T-shirts $14, movies $7.
Margin
The current level of an activity; the edge from which a decision is made.
Normal good
A good whose demand rises when income rises.
Inferior good
A good whose demand falls when income rises.
Examples
Generic store-brand food, used vehicles, certain low-cost services. As income rises, people trade up; demand for the inf
Substitution effect
When a good's price rises, consumers shift toward cheaper alternatives.
Income effect
A price increase reduces real purchasing power, leading to less consumption of normal goods, even with no change in actu
Behavioral economics
A branch of economics that integrates psychology into economic decision-making; investigates how the same dollar amount