Consumer Behavior

Vocabulary

budget constraint (BC)

a representation of the choices between two goods that consumers make based on their income

diminishing marginal utility

the observation that each additional unit of a product consumed will yield progressively smaller increases in utility

disutility

sadness or lack of satisfaction that a consumer gets from consuming an item

indifference curve (IC)

graphical representation showing the utility consumers get from consuming combinations of two goods; usually graphed as a curve

marginal utility (MU)

the incremental utility associated with consuming one additional unit of a good

optimal consumption

a situation in which individuals consume in ways to get the best return for consumption

optimal consumption point

the one point in optimization where the consumer receives the highest utility

optimality equation

a formula to calculate the best consumption possibility

utility (U)

a quantitative measure of happiness or satisfaction used in economic analysis

utility maximization

the process of choosing the combination of goods that provides the highest possible level of happiness

utility-maximizing condition

a situation that assumes that consumers spend every last dollar in ways that optimize utility