Chapter 8 Utility and Demand

Budget Line
The limit to a household’s consumption choices. It marks the boundary between those combinations of goods and services that a household can afford to buy and those it cannot afford.

A description of a person’s likes and dislikes and the intensity of those feelings.

The benefit or satisfaction that a person gets from the consumption of goods and services.

Total Utility
The total benefit that a person gets from the consumption of all the different goods and services.

Marginal Utility
The “change” in total utility resulting from a one-unit increase in the quantity consumed.

Diminishing Marginal Utility
The tendency for marginal utility to decrease as the quantity consumed of a good increases.

Consumer Equlibrium
A situation in which a consumer has allocated all his or her available income in the way that, given the prices of goods and services, maximizes his or her total utility.

Marginal Utility per Dollar
The marginal utility from a good that results from spending one more dollar on it. It is calculated as the marginal utility from the good divided by its price.

Behavioral Economics
A study of the ways in which limits on the human brain’s ability to compute and implement rational decisions influences economic behavior—both decisions that people make and the consequences of those decisions for the way markets work.

The study of the activity of the human brain when a person makes an economic decision.

The reason why we do not always make rational economic choices/decisions
Behavior Economics & Neuroeconomics seek to acheive:

• Bounded Rationality
• Bounded Willpower
• Bounded Self-interest
(3) Limitations on Human Rationality:

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