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