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 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