Chapter 20: Consumer Choice and Elasticity
Inferior Good
A good that has a negative income elasticity, so that as consumer income rises, the demand for the good falls.
Normal Good
A good that has a positive income elasticity, so that as consumer income rises, demand for the good rises, too.
Marginal Utility
The additional utility, or satisfaction, derived from consuming an additional unit of good
Law of diminishing marginal utility
The basic economic principle that as the consumption of a product increases, the marginal utility derived from consuming more of it (per unit of time) will eventually decline
Marginal Benefit
The maximum price a consumer would be willing to pay for an additional unit of a product. It is the dollar value of the consumer's marginal utility from the additional unit, and therefore it falls as consumption increases
Substitution Effect
The part of an increase (decrease) in amount consumed that is a result of a good being cheaper (more expensive) in relation to other goods because of a reduction (increase) in price
Income Effect
The part of an increase (decrease) in amount consumed that is a result of the consumer's real income being expanded ( contracted) by a reduction (rise) in the price of a good.
Price Elasticity of Supply
The percentage change in quantity supplied/the percentage change in the price that caused the change in quantity supplied
Income Elasticity
The percentage change in the quantity of a product demanded/the percentage change in consumer income that caused the change in quantity demanded. It measures the responsiveness of the demand for a good to a consumer's change in income
Price Elasticity of Demand
The percentage change in the quantity of a product/the percentage change in price that caused the change in quantity. The price elasticity of demand indicates how responsive consumers are to a change in a product's price