Consumer Behaviour and Utility Theory

The principle that as you consume more of a good, the additional satisfaction you get from each extra unit decreases.

The curve representing the Law of Diminishing Marginal Utility. It slopes downwards, showing that additional satisfaction decreases with increasing consumption.

The extra satisfaction you get from consuming one more unit of a good.

Explains why people diversify their consumption. They buy different things to keep getting good satisfaction from each purchase.

States that as the price of a good goes down, people will demand more of it, all else being equal.

Price strategies use the fact that consumers value later units of a good less, like using discounts or bundling.

The principle that rational people allocate their limited resources among different goods to get the most overall satisfaction.

The additional satisfaction you get from one more unit of a good is equal to the additional satisfaction you get from one more unit of another good.

The ratio of marginal utility to the price of a good. It signifies the amount of additional satisfaction you get per dollar spent on that good.

A curve showing combinations of goods that provide a consumer with the same level of satisfaction. Higher indifference curves represent higher levels of utility.

A line that shows all the combinations of goods a consumer can afford given their budget and the prices of goods.

The combination of goods that a consumer chooses to maximize their total utility given their budget constraints, which is achieved when the marginal utility per dollar spent is equal across all goods.

The difference between the total utility obtained from consumption and the total expenditure on goods and services. This occurs due to the decreasing marginal utility, making the first units more valuable to the consumer.

The rate at which a consumer is willing to trade one good for another while maintaining the same level of satisfaction.

Indifference curves always slope downwards from left to right because as you get more of one good, you need less of the other to stay at the same level of satisfaction.

Indifference curves are curved inwards towards the origin. This indicates that the more you have of one good, the less you're willing to give up of the other to get more of it.

Because if they intersected, a consumer would be indifferent between two different combinations of goods, which violates the assumption that preferences are transitive (meaning if you prefer A to B and B to C, you must prefer A to C).

Indifference curves further away from the origin represent higher levels of satisfaction because they show combinations of goods that give the consumer more of both goods.

As a consumer consumes more of one good, they are willing to give up fewer units of the other good to maintain the same level of satisfaction.

A consumer's preferences must be transitive, meaning if they prefer bundle A to bundle B and bundle B to bundle C, then they must prefer bundle A to bundle C.

Goods whose demand decreases as income increases. Think of generic brands or public transportation.

Goods that can be used instead of each other, like tea and coffee.

Goods that are consumed together, like coffee and sugar.

The principle that producers are willing to supply more of a good when its price is higher.

All the things involved in producing a good, like raw materials, labor, and capital.

Technology advancements that make production more efficient, leading to more output at the same price.

Consumers' beliefs about future prices, income, or availability of goods influence their current buying decisions.

Changes in customer preferences, like becoming more health-conscious or environmentally aware, affect demand for goods and services.

Producers make more goods with the same amount of labor because of new technology.

The cost of materials and labor affects how much a company can make and sell.

Companies change their production based on what they think will happen in the future.

The law of demand states that as prices increase, people buy less of a good.

When a product gets more expensive, people look for cheaper substitutes.

When prices rise, your money buys less, so you buy less, even if you want more.

The idea that, ceteris paribus, the amount of stuff people want (demand) goes down as the price goes up.

The combined effect of the substitution and income effects on how much people buy of a good.

Factors besides price that can influence the quantity demanded of a good. These factors include income, prices of related goods, consumer preferences, and expectations.

Goods for which demand goes up as income increases.