Sections
Key Terms
Key Terms
- backward-bending supply curve for labor
- the situation when high-wage people can earn so much that they respond to a still-higher wage by working fewer hours
- behavioral economics
- a branch of economics that seeks to enrich the understanding of decision-making by integrating the insights of psychology and by investigating how given dollar amounts can mean different things to individuals depending on the situation.
- budget constraint line
- shows the possible combinations of two goods that are affordable given a consumer’s limited income
- consumer equilibrium
- when the ratio of the prices of goods is equal to the ratio of the marginal utilities—that is, the point at which the consumer can get the most satisfaction)
- diminishing marginal utility
- the common pattern that each marginal unit of a good consumed provides less of an addition to utility than the previous unit
- fungible
- the idea that units of a good, such as dollars, ounces of gold, or barrels of oil are capable of mutual substitution with each other and carry equal value to the individual.
- income effect
- a higher price means that, in effect, the buying power of income has been reduced, even though actual income has not changed; always happens simultaneously with a substitution effect
- marginal utility
- the additional utility provided by one additional unit of consumption
- marginal utility per dollar
- the additional satisfaction gained from purchasing a good given the price of the product; MU/Price
- substitution effect
- when a price changes, consumers have an incentive to consume less of the good with a relatively higher price and more of the good with a relatively lower price; always happens simultaneously with an income effect
- total utility
- satisfaction derived from consumer choices