EC201-Chp9

EC201-Chp9 - Failure to ignore sunk costs ■ Overly...

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EC201- Chapter 9 Terms Utility - Enjoyment or satisfaction people receive from consuming goods and services (unit: utils ) Marginal Utility (MU) - The change in total utility a person receives from consuming one additional unit of a good or service Law of Diminishing Marginal Utility - The principle that consumers experience diminishing additional satisfaction as they consume more of a good or service during a given period of time Two Conditions for Maximizing Utility MU object1 ÷ P object1 = MU object2 ÷ P object2 Spending on object1 + Spending on Object2 = Amount of available to be spent Network Externality - The situation where the usefulness of a product increases with the number of consumers who use it Behavioral economics - The study of situations in which people make choices that do not appear to be economically rational Consumers take into account monetary costs but ignore nonmonetary opportunity costs
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Unformatted text preview: Failure to ignore sunk costs ■ Overly optimistic about their future behavior Endowment effect- The tendency of people to be unwilling to sell a good they already own even if they are offered a price that is greater than the price they would be willing to pay to buy the good is they didn’t already own it Sunk Cost- A cost that has already been paid and cannot be recovered ■ If you are unrealistic about your future behavior, you underestimate the costs of choices that you make today Indifference Curve- A curve that shows the combinations of consumption bundles that give the consumer the same utility ■ The higher—or further to the upper right—the indifference curve is, the greater the utility Marginal Rate of Substitution (MRS)- The slope of an indifference curve, which represents the rate at which a consumer would be willing to trade off one good for another...
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This document was uploaded on 10/11/2008.

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