Chapter 5

consumer surplus for straight line demand curve

(1/2) x P x Q

algebraic rational spending rule

MU(chocolate) / P(chocolate) = MU(vanilla) / P(vanilla)

utility

a concept used to represent the satisfaction people derive from their consumption activities

nominal price

absolute price of a good in dollar terms

greater marginal utility

consuming less of a good yields...

less marginal utility

consuming more of a good yields...

to increase total utility

if the ratio were higher for one good than the other, the consumer could always increase total utility by spending less on the good which marginal utility was higher and spending more on the good which marginal utility was lower

the rational spending rule

spending should be allocated across goods so that the marginal utility per dollar is the same for each good

marginal utility

the additional utility gained from consuming an addition unit of a good = (change in utility) / (change in consumption) ex. (90 utils - 50 utils) / (2 cones - 1 cone) = 40 utils/cone

optimal combination of goods

the affordable combination that yields the highest total utility

consumer surplus

the difference between a buyer's reservation price for a product and the price actually paid

real price

the dollar price of a good relative to the average dollar price of all other goods

law of diminishing marginal utility

the tendency for the additional utility gained from consuming an additional unit of a good to diminish as consumption increases beyond some point

demand for a good falls

when the real price of a substitute falls or the real price or a complement rises