Microeconomics Ch.7 Elasticity and Consumer Choice
Income effect
that part of an increase (decrease) in amount consumed that is the result of the consumer's real income being expanded (contracted) by a reduction (increase) in the price of a good.
Substitution effect
that part of an increase (or decrease) in amount consumed that is he result of a good being cheaper (or more expensive) in relation to other goods because of a reduction (or increase) in price.
Marginal Utility
the additional utility or satisfaction derived from consuming an additional unit of a good.
Johnny walks into a car dealership and says he won't pay any more than $20,000 for the new Nissan he wants. The Nissan dealer says the retail price of the car is $23,999. By stating their price preferences up front, each are attempting to use
the anchoring effect.
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.
inferior good
a good that has a negative income elasticity. As consumer income rises, the demand for the good falls.
normal good
a good that has a positive income elasticity. As consumer income rises, the demand for the good rises, too.
People tend to track consumption by
bundles over individual items
Marginal Benefit
in dollars, the maximum that a consumer is willing and able to pay for an additional unit of a product. It's the dollar value of the consumer's marginal utility from the additional unit, and therefore it falls as consumption increases.
As the consumption of a product increases, utility .... This illustrates the law of
increases at a decreasing rate, so the marginal utility curve is negatively sloped. ... diminishing marginal utility. ... The shapes of the utility curves reflect the law of diminishing marginal utility.
Income elasticity
the percentage change in the quantity demanded of a product divided by the percentage change in the consumer's income. In other words, how much quantity demanded changed because income changed. It indicates how responsive consumers are to a change in their income.
Price elasticity of demand
the percentage change in the quantity demanded of a product divided by the percentage change in the price. In other words, how much quantity demanded changed because the price changed. It indicates how responsive consumers are to a change in a product's price.
price elasticity of supply
the percentage change in the quantity supplied of a product divided by the percentage change in the price. In other words, how much quantity supplied changed because the price changed. It indicates how responsive producers are to a change in a product's price.
